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UK interest rates could see a reduction this summer, according to Ben Broadbent, the Bank of England’s outgoing deputy governor for monetary policy.
Broadbent indicated that if the economy evolves as anticipated, borrowing costs might be lowered “sometime over the summer” in response to a significant drop in inflation.
The primary inflation drivers over the past two years – the Covid-19 pandemic and the Ukraine war – have diminished, Broadbent said. The Bank of England is now monitoring whether the longer-term domestic effects on prices will also decrease before making the first interest rate cut. The Monetary Policy Committee’s (MPC) nine members are assessing how these “second-round effects” in domestic prices and wages might alter the inflation trajectory over the next two years.
Analysts have differing views on the potential for a rebound in inflation later this year, which could influence the Bank’s plans for rate cuts. Capital Economics predicts that inflation will drop below the Bank’s 2% target with the April figures and fall to less than 1% before year-end. This underpins their forecast that the Bank will reduce interest rates from the current 5.25% to 3% next year, rather than the 3.75% anticipated by investors.
Conversely, some analysts expect inflation to rise above 3% before year-end due to persistently high services inflation and wage increases in the financial and business services sectors, which could push prices higher.
Broadbent acknowledged the range of views within the committee, stating, “Whatever the priors of its individual members, the MPC will continue to learn from the incoming data. If things continue to evolve as forecasted, suggesting that policy will have to become less restrictive at some point, then it’s possible Bank rate could be cut sometime over the summer.”
Earlier this month, the MPC voted 7-2 to keep interest rates unchanged at their 16-year high of 5.25%, with Broadbent among those opting for no change. Current money market indicators suggest a 57% chance of rates being lowered to 5% at the Bank’s next meeting in June, with a cut by August almost fully anticipated.
Michael Saunders, a former MPC member now with Oxford Economics, supports the likelihood of a summer rate cut, potentially sooner than the US Federal Reserve. Saunders forecasts that the Bank of England’s MPC will start reducing rates in the summer, with the first cut possibly in June or August, and a total reduction of 75 basis points by year-end. This prediction comes ahead of anticipated US rate cuts, expected to begin in September with a 50 basis point reduction by year-end.
