Bank of England hopes interest rates are at their peak

The Bank of England said that borrowing costs had peaked, and inflation would fall to the target of 2% in the spring.

Andrew Bailey, governor of the state, stated that the “key” question was now when to reduce rates. This could provide homeowners with further relief.

Jeremy Hunt, chancellor of the Bank, said the Bank’s decision on holding rates steady and signaling reductions was “very good news” for those with mortgages. He claimed that inflation is falling “dramatically quicker” than many people expected.

Bank of England has voted to keep interest rates at the highest level in 16 years, 5.25 percent. However, it was a divided decision. One member of the monetary committee (MPC), which sets interest rates, voted to cut interest rates for first time since march 2020.

The Bank has now dropped its warnings about “further tightening”, or an increase in interest rates, in response to the sharp drop in inflation. The Bank said it would “keep under consideration” the length of time rates should remain at current levels.

Bailey said: “The question is no longer how strict we should be, but how long we will need to maintain this position.”

In a cautionary note, the Bank warned that inflation would rise this year after it fell to 2% in the spring.

Bailey stated that wages are still too high for us to be confident that the target can be achieved. The Bank stated that it was not ready to declare “the task is complete”.

Rishi Sunak’s hopes of closing the gap between him and Labour are dependent on the prospect of lower interest rates. Tories believe that lower interest rates combined with tax reductions will help them win back voters, while Labour blames the government for home-owners who continue to sign up to expensive monthly deals.

Hunt said that it was “clearly very good news for mortgage-holding families” to see the interest rates peak.

He admitted that inflation could “tick up” a bit this month. But he insisted, “The overall picture shows inflation falling dramatically faster and the economy is much stronger, with the Bank of England updating its forecasts for the coming year, the next and the following year.” This shows that we have made difficult decisions and the plan has worked.

Sandra Horsfield is an economist with Investec. She said, “The MPC debate has now shifted away from how restrictive the policy should be, to how long it needs to continue.” The MPC collectively believes that it’s a question of when, and how much to reduce policy rates, rather than whether or not.

The Bank of England’s softer interest rate guidance could provide further relief to the mortgage markets after several lenders offered deals below 4% in the past month. The Bank of England released data this week showing that mortgage rates have fallen for the first since 2021.

Hunt slammed the Office for Budget Responsibility (the spending watchdog) for describing his post-election plans as ” fiction”.

The Treasury’s plan implies significant cuts for non protected departments, but Hunt has not provided any details. And the spending watchdog said that “someone wrote a fictional work and the government didn’t bother to write down its departmental expenditure plans”.

Hunt criticised the OBR, saying: “These words were wrong and should not have even been said.” Spending plans and reviews are decided by the government. We will not release our spending plans until the next spending review in April 2025. “No government has ever done that.”

The chancellor said he wouldn’t have space in the budget for “untargeted” tax cuts, which are “just crowd-pleasers”. He wanted to “set expectations of the people about the size of what I am going to do”.

He said on BBC’s political thinking podcast he planned “strategic and smart tax cuts” to grow the country’s economy. “We want to be very clear about the direction we want to travel in, which is to reduce the tax burden.”

Labour tried to position itself as a party of business by promising not to increase corporation tax during its first five years as a government.

Rachel Reeves , the shadow chancellor at an event attended by hundreds senior corporate executives on Thursday, praised profit and called it “a sign of success” for business. She also said that the 25p corporation tax rate “strikes a balance between our public finances needs and the global competitiveness of the economy.”

She blamed the ministers for current high interest rates, saying that “Households in Britain are paying for 14 years economic failure under Conservatives, and because they crashed their economy, which sent rates soaring after their kamikaze Budget.”