Rate cuts are ‘on the way’, says Bailey

Andrew Bailey has said interest rate cuts are “on the way” even as the Bank of England held borrowing costs at a 16-year high for the fifth meeting in a row.

The Governor sparked a stock market rally after delivering his strongest signal yet that policymakers were on course to reduce rates this summer, adding it was “reasonable” to expect two or three cuts this year.

While Bank officials voted to keep borrowing costs unchanged at 5.25pc on Thursday, Mr Bailey’s comments prompted traders to ramp up their bets on rate cuts this year.

Britain’s FTSE 100 enjoyed its best day this year, closing up 1.9pc at 7,882, while benchmark borrowing costs edged down and the pound slipped by more than a cent against the dollar to $1.265.

Mr Bailey said recent data showed inflation was “moving in the right direction” and described February’s surprise fall in inflation from 4pc to 3.4pc as “very encouraging and good news”.

While insisting he would not “endorse” the view of financial markets, Mr Bailey said it was “reasonable that markets are taking that view” that there will be two to three rate cuts this year “given how inflation has performed”.

The Governor added that this was not a “prediction from me either on timing or amount”.

His comments came as policymakers voted 8-1 to leave rates on hold. In a decisive shift, two members of the Bank’s Monetary Policy Committee (MPC) dropped their call for higher rates, while external member Swati Dhingra repeated her call to lower the Bank’s base rate to 5pc.

It was the first MPC meeting since September 2021 where none of the MPC’s nine members voted to raise rates.

Economists agreed that interest rate cuts were getting closer. Sanjay Raja, chief UK economist at Deutsche Bank, said the Bank could cut rates as soon as May.

He said: “A 8-1 vote tally, we think, opens the door more firmly for a rate cut in the second quarter [and] sets the stage for the MPC to begin its next phase of monetary policy.”

Bank policymakers said inflation was likely to fall below their 2pc target in the coming months following Jeremy Hunt’s decision to freeze fuel duty in the Budget.

They also estimated that the Chancellor’s decision to cut National Insurance by 2p would boost growth by around 0.25pc over the next few years.

Mr Bailey said: “In recent weeks we’ve seen further encouraging signs that inflation is coming down. We’ve held rates again today at 5.25pc because we need to be sure that inflation will fall back to our 2pc target and stay there.

“We’re not yet at the point where we can cut interest rates, but things are moving in the right direction.”

Policymakers said the timing of rate cuts continued to remain “under review”, adding that pay growth was still robust and could even be taking longer to come down than official figures suggest.

Expectations for future wage growth remain at 5.2pc, which Mr Bailey has suggested is not consistent with the Bank’s inflation target.

However, there are also signs that the jobs market is loosening. Businesses are becoming more willing to let staff go “as they perceive it to be less difficult to recruit in the future”, the Bank said.

A Bank survey suggested that food price rises were likely to keep moderating, with large supermarkets now expecting food inflation to be “around 4pc by spring” and between 3pc and 4pc for the rest of 2024.

Non-food inflation was reported as “returning to normal”, while prices of some big ticket items like furniture have also started to fall. The Bank noted that there was a “growing sense that house prices have bottomed out and are now expected to stay flat or grow modestly over the next few months”.

However, its survey added that rental demand “remains strong”.

A separate survey on Thursday suggested Britain was already out of recession. S&P Global’s flash estimate of economic activity showed March is on track to be the fifth month of growth in a row.

However, the Bank warned that the contraction in the private sector at the end of last year was much deeper than headline figures suggested.

Stripping out public sector growth in health and education, the economy probably shrank by 0.4pc in the three months to the end of September and the following three months, the Bank said.