The Bank of England’s departing deputy governor hinted on Monday that UK interest rates may be reduced this summer. This would add to the expectation of a first cut in borrowing costs as early as next month.
Ben Broadbent said the Bank’s deputy Governor for Monetary Policy, Ben Broadbent, stated that, if the economy develops as expected, it is possible to lower borrowing costs “sometime over the summer”, in response to a sharp fall in inflation.
Broadbent stated that the two main factors of inflation in the last two years, the Covid-19 pandemic as well as the Ukraine War had diminished. The Bank is now watching closely to see if the domestic effects will also decrease over time before making the first interest rate cut.
He said that the nine members of the monetary policies committee (MPC) must evaluate how these “second-round” effects in domestic wages and prices change the course inflation over the next 2 years.
Analysts disagree on the likelihood that inflation will rise later this year, which could force the Bank to suspend its rate-cutting plans.
Capital Economic predicts that the inflation rate will drop below the central banks 2% target on Wednesday when the April figures are released and fall to less than 1% by the end of the calendar year.
The consultancy stated that “this underpins our prediction that the Bank of England will reduce interest rates to 3% in the next year from the current 5.25%, not to 3.75% like investors expect.”
Analysts expect the inflation rate to rise above 3% by the end of this year, as the persistently high service inflation and wage increases within the financial and business services industries continue to be high. This will lead prices up.
Broadbent stated: “There are a variety of opinions on this issue within the committee.” This is understandable, given the rarity and uncertainty of such events in the past.
The Bank Rate could be reduced sometime during the summer, regardless of the individual member’s priors.
Broadbent was one of the seven MPC members who chose to keep interest rates at their 16-year-high of 5.25%.
Money markets indicate that a rate cut to 5% is likely at the next Bank meeting in June. A reduction by August has been almost fully priced.
Michael Saunders said that the Bank would likely start reducing rates this summer and earlier than the US Federal Reserve.
Saunders is now a senior economist at Oxford Economics. He said: “We anticipate the BoE’s Monetary Policy Committee will cut rates in the near future. The first cut could be between June and august, and rates would fall by 75bps by the end of the year. This is slightly earlier than the US easing forecast, which calls for a first rate cut in September. Rates are expected to fall by 50bps at year-end.
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