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Bank Of England 'Optimistic' as Rate Cut Looms This Summer

The Bank of England governor has indicated a need to "see more evidence" that price increases have sufficiently curbed before lowering interest rates. Andrew Bailey maintained an "optimistic" outlook that "things are moving in the right direction" while rates remain steady at 5.25%.

He anticipates inflation, which gauges the pace of rising prices, to drop "close" to the Bank's target level within the coming months, signaling a potential interest rate cut as soon as June. But Mr. Bailey cautioned that a cut was "not a fait accompli, it's not a done deal".

The most likely timing for a reduction appears to be August or September, especially if inflation declines as projected.

The Bank's interest rate sets the benchmark for borrowing costs on high streets. Currently at their highest in 16 years, rates have inflated mortgage and loan payments while boosting interest for savers.

Mr. Bailey acknowledged "encouraging news" on inflation, presently at 3.2%, but emphasised the Bank's requirement for "more evidence" of sustained decline before adjusting rates.

Nonetheless, during the news conference following the Bank's decision, Mr. Bailey noted, "it is likely that we will need to cut bank rates over the coming quarters", hinting at a deeper reduction than financial markets currently anticipate.

Within the nine-member Monetary Policy Committee, which decides on rates, a shift toward a cut is evident, with two members voting for a reduction and seven for maintaining the status quo.

The Bank expressed improved positivity regarding the UK's economic outlook in its latest forecast:

  • Inflation expected to align with the Bank's 2% target shortly and fall to 1.9% in 2026.

  • Economic growth projected at 0.4% for the first quarter of 2024 and 0.2% from April to June.

Chancellor Jeremy Hunt declared he would "much rather" policymakers "wait until they are absolutely sure" inflation is easing than "rush into a decision that they had to reverse at a later stage". However, he saw Mr. Bailey's "real optimism" as an encouraging first.

Shadow Chief Secretary to the Treasury, Darren Jones, emphasized the Bank of England's "independent right" to set interest rates but remarked that this was "bad news for people at home having to reset their mortgages for the years ahead at a more expensive rate and people to have to pay rent for their homes".

The state of the UK economy remains a focal point, with economic policies poised as a pivotal issue in the upcoming election anticipated before the year's close.

When pressed on whether the economy had turned a corner, Mr. Bailey asserted: "All the evidence we see is that we have turned a corner from that." He cautioned, however, that recovery would not be "strong".


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