- BoE rate-setters vote to hold rates at 5.25 per cent
- Fed maintains interest rates at 5.25-5.5 per cent against uncertain inflation backdrop
The Bank of England’s Monetary Policy Committee (MPC) has voted to maintain the base rate at 5.25 per cent for the fifth meeting.
Eight committee members voted to hold rates at 5.25 per cent, while one favoured a 0.25 percentage point cut. The vote implies increasing confidence among policymakers about the progress of inflation. In February’s meeting, two members of the MPC still favoured an additional 0.25 percentage point rate hike, and one a cut.
In a statement issued after the decision, rate-setters said the committee would review how long rates need to be maintained at the current level. It warned that “monetary policy will need to remain restrictive for sufficiently long” to ensure that inflation would return sustainably to target.
The US Federal Reserve also held rates on Wednesday, leaving them at 5.25-5.5 per cent. Fed policymakers said they would not adjust interest rates until they had “gained greater confidence” that inflation was moving towards the 2 per cent target but still forecast three cuts later in the year. However, their projections implied core inflation would prove more persistent than expected this year.
The UK is no longer an outlier
The latest decisions come against an encouraging inflation backdrop for the UK – and a more mixed one for the US.
For a while, the UK looked like an inflation outlier: in June last year, the UK inflation rate was almost 9 per cent, while it had plunged to 4 per cent across the pond. Today disinflation in the UK is gathering momentum. The headline rate has fallen to 3.4 per cent and is expected to return to the 2 per cent target later this spring.
In the US, the picture is more challenging. Inflation came in higher than expected in February, with the headline rate of CPI rebounding from 3.1 per cent to 3.2 per cent. Analysts at Oxford Economics believe US inflation is still “gradually – if erratically – retreating”, adding that the Fed is still on track to cut rates – though “probably not as soon as earlier expected”.
In January, markets placed their bets on a first US rate cut in March and had priced in almost 1.5 percentage points of easing over the year.
According to the CME FedWatch tool, traders now expect a first rate cut in June and see a more modest 0.75 percentage points of cuts in 2024. The Fed’s latest interest rate projections were unchanged from December and implied that interest rates would fall to 4.6 per cent by the end of 2024. US markets and central bankers are more in sync than at the start of the year.
Rate cuts later in the year
With the UK economy already in a technical (though mild) recession, Bank of England rate-setters are sensitive to the risks of ‘overtightening’ by keeping interest rates too high for too long. Historically, the MPC has ‘turned’ two meetings after the first vote for a rate cut – which came in the February meeting. But rate-setters remain concerned about inflation becoming ‘embedded’ in the economy and the tightness of the UK labour market.
Figures released last week suggested that the UK unemployment rate rose from 3.8 per cent to 3.9 per cent, a sign that the labour is cooling. Yet the ONS warned that the figures should be treated with “additional caution” thanks to problems with the survey data that underpins them.
The MPC’s decision is complicated further by the fact that the National Living Wage is set to increase by 10 per cent in April. Economists expect the BoE to wait to see how this feeds through to inflation data before moving to cut rates. As a result, it’s unlikely that the BoE will have enough evidence to be confident that inflation is returning to target by the next meeting in May. Cuts are coming – though we must wait until later in the summer.
