The governor of the Bank of England has signalled readiness to resume interest rate cuts despite keeping borrowing costs unchanged on Thursday at 5%, amid concerns over lingering high inflation.
Andrew Bailey said the central bank was “now gradually on the path down” from borrowing costs that were among the highest since before the 2008 financial crisis. “I think interest rates are going to come down, I’m optimistic on that front,” he said.
Earlier on Thursday, the Bank’s monetary policy committee (MPC) had voted by a majority of eight to one against launching a back-to-back reduction in interest rates, pausing its efforts to ease the pressure on household budgets.
Last month, the Bank cut interest rates for the first time since the Covid pandemic was declared four years ago, after a sharp fall in inflation from a peak of more than 11% in late 2022 – the highest level since the early 1980s.
Bailey said that while inflationary pressures had continued to ease, he wanted to caution people against expectations of a rapid easing of monetary policy. “We need to be careful not to cut too fast or by too much,” he said.
The annual rate of inflation remained unchanged at 2.2% in August, marginally above the Bank’s 2% inflation target.
The decision to keep rates on hold had been widely expected in the City. The pound jumped to its highest level against the dollar since March 2022 after the Bank’s decision, hitting $1.33.
The US Federal Reserve cut interest rates by half a percentage point on Wednesday, the first reduction in four years, as the world’s most powerful central bank stepped back from its aggressive bid to cool inflation in the US economy. The European Central Bank has also cut interest rates twice, by a quarter of a percentage point at non-consecutive policy meetings.
Most economists predict the Bank will resume cutting rates within months should inflationary pressures in the UK economy continue to fade, with financial markets pricing in the expectation of a further quarter-point reduction in borrowing costs to 4.75% at its next policy meeting in November.
Since cutting interest rates last month, the MPC said inflationary pressures had continued to ease as expected. One member of the committee, the independent economist Swati Dhingra, voted for another immediate quarter-point cut in borrowing costs, going against most of the nine-strong panel.
However, the Bank said headline inflation was on track to rise to about 2.5% before the end of this year – a marginally lower level than it anticipated in August – amid resilient price growth in the UK service sector and a tight jobs market.
In the minutes of its meeting, the MPC said: “Monetary policy would need to continue to remain restrictive for sufficiently long enough until the risks to inflation returning sustainably to the 2% target in the medium term had dissipated further.”
Highlighting concerns over inflation above the 2% target, the central bank said it would maintain a process of selling government bonds amassed on its balance sheet under its crisis-era quantitative easing programme.
Threadneedle Street said it would reduce the stock of UK government bonds by £100bn over the next year, aiming to reduce the total amount to £558bn. At its peak, the Bank held up to £895bn of bonds, in a policy designed to lower borrowing costs and keep markets functioning efficiently during the 2008 financial crisis and the peak of the Covid pandemic.
The development is likely to be closely watched by the chancellor, Rachel Reeves, before next month’s budget, amid speculation she could change the government’s self-imposed fiscal rules to exclude the impact of the Bank’s quantitative easing programme.
Some economists have suggested such a change could open up additional headroom of about £20bn.
Andrew Goodwin, chief UK economist at the consultancy Oxford Economics, said that although the Bank had paused its round of interest rate cuts, it would probably resume its efforts at the MPC’s next policy meeting in November.
“We regard another rate cut in November as almost certain,” he said. “There’s also been a clear change of tone by central banks globally in recent months, moving from a total focus on inflation towards giving greater consideration to growth concerns.”
