The Bank of England held UK interest rates to 5.25 percent and indicated it was moving closer to reducing borrowing costs. This will weaken sterling and boost stocks.
Andrew Bailey, the Governor of the Bank of England’s Monetary Policy Committee, said that inflation was “moving in a positive direction” after the committee kept the benchmark interest rate at its highest level for 16 years. This is the fifth time the BoE has done this.
Two members who previously demanded higher interest rates have now voted with the majority to keep rates unchanged.
Sterling fell 0.9 percent against the dollar on Thursday, closing at $1.267.
The swaps market has begun to price in the three cuts of 0.25 percentage points from the BoE that are expected to start in June.
Bailey stated that “in recent weeks, we have seen more encouraging signs of inflation coming down.” “We are not yet in a position where we can reduce interest rates but things are going in the right directions.”
BoE officials are becoming more optimistic about inflation after the US Federal Reserve ignited a market rally over night, as officials indicated they wanted to reduce interest rates by three quarters of a percent this year.
The rally and BoE’s statement helped boost the FTSE 100 index 1.9 percent, its largest one-day gain in September.
The Swiss National Bank cut its key interest rate unexpectedly on Thursday, a sign that borrowing costs worldwide are going down. The European Central Bank also indicated that it would cut rates in June.
The BoE stated that the UK economy is “improving” after it fell into a technical slump in the second half last year.
The Conservative Party in Britain is expected to increase its pressure for budget cuts ahead of the upcoming general election.
The BoE has changed its language to signal that the MPC will “continue to assess the degree of restriction of policy at every meeting”.
The bank stated on Thursday that the official data shows a “relatively steep” drop in inflation since the last MPC Meeting in February.
The consumer price index for February was lower than expected at 3.4% — the lowest level since 2021.
As wage growth slows, the BoE expects inflation in the second quarter to be slightly lower than its target of 2 percent. The BoE said on Thursday that even after the rates are reduced, they will be high enough for inflation to be combated.
The bank has warned, however, that service prices continue to be “elevated”. They rose by a rate of 6.1% per annum last month.
The BoE’s note on the MPC shows that the members are divided “on the degree of evidence” that falling prices pressures would be needed to reduce rates.
Jonathan Haskel, Catherine Mann, and the other eight MPC members did not vote to raise rates by a quarter-point at this week’s MPC meeting. Swati Dhingra was the only member who continued to support a rate cut.
The last time that no one voted in favor of a rate hike on the MPC occurred in the fall of 2021