Bank of England expected to hold interest rates - BBC

ShareSaveDearbail JordanBusiness reporterShareSaveGetty ImagesThe Bank of England has held interest rates at 3.75% after a knife-edge vote which split the decision-making committee five to four. Economists had not forecast a cut after borrowing rates were reduced in December, and against a mixed economic backdrop. Governor Andrew Bailey told the BBC that there was likely to be "some further reduction" in rates later this year. The Bank also lowered its prediction for economic growth for this year and raised its forecast for unemployment, expectations which make further rate cuts more likely. Bailey said rates were not expected to fall back to the lows seen at the start of the pandemic, which were the "product of exceptional things going on, starting with the financial crisis". Speaking to the BBC's deputy economics editor, Dharshini David, Bailey said current economic conditions were "encouraging". "There's a bit further to go. We need to see some more evidence that we are on a sustainable path. We've taken a big step forwards," he said. Bailey predicted that CPI inflation, one measure of of how fast prices are rising, would drop down to 2%, the Bank of England's target, by "some point in the Spring". The Bank uses higher interest rates as a tool to keep inflation in check. "The judgement then is, what level of interest rate will be consistent with keeping it there," he said. "I think we're approaching that rate." Prices increased by 3.4% in the year to December but the Bank said policies announced in the Budget, such as reductions in household energy bills, were likely to bring the inflation rate down. However the Bank lowered its outlook for UK economic growth in 2026, from the 1.2% growth it forecast last November to 0.9%. The unemployment rate is also expected to tick higher this year, according to the Bank, up from an initial forecast of 5% to 5.3%. Concerns over economic growth and jobs, which are usually boosted by lower interest rates, led the four members of the monetary policy committee (MPC) who had voted to lower borrowing costs in December, to say rates should be cut by another quarter point this month. However, the four who had voted to keep rates steady last month, also stuck with their previous position. Only Bailey switched, from supporting a cut in December to opposing one this time. Analysts said the Bank's comments meant there would be raised expectations of a rate cut at the Bank's next two meetings. "We've pencilled in the next cut for the meeting in late April, but wouldn't completely rule out March," said Paul Dales, chief UK economist at Capital Economics. Lindsay James, investment strategist at wealth management firm Quilter, said markets "had not been fully pricing in the first rate cut until June, but this has shifted to April following today's report." Analysts and mortgage brokers said some property buyers and those renewing a mortgage deal, would be disappointed at the decision not to cut rates, at the start of the housing market's busiest period, but could expect lower borrowing rates down the line. However, Bart Ambrozik, a HGV driver from Coventry, said he felt it was already the "perfect" time for him to buy. He has been trying for three years to buy his first house, but high mortgage rates had made it too expensive. "I feel happy, and also quite confident putting offers down," he said. However, he said others were doing the same "so getting a mortgage or property is more difficult than it was a few years ago". For savers lower rates are a disadvantage, with more than two thirds (70%) of providers having cut the rate they pay on savings since the start of the year, according to financial information service Moneyfacts. A lower inflation rate would mean the value of savings was eroded more slowly, but also mean the Bank of England is more likely to cut interest rates. Although inflation is expected to slow, lacklustre economic growth adds pressure to the Bank of England to cut rates. Firms which spoke to Bank of England agents across the UK indicated that they were hiring less or taken a hit to their profit, after the rise in the minimum wage and higher National Insurance payments pushed up their costs. A recent rise in unemployment "has been concentrated among the youngest age groups" the Bank said. Looking ahead, businesses told the Bank they believed that food price inflation had peaked. Prices for goods such as cocoa and cattle rose sharply last year but companies and producers said these had since fallen from recent highs. Speaking at a news conference following the Bank's decision, Bailey said he was "shocked" at the claims surrounding the former business secretary Lord Mandelson and his relationship with Jeffrey Epstein. It follows suggestions Mandelson sent market-sensitive information to Epstein while serving as a Cabinet minister. "A year ago I had to give evidence in a legal case around this issue," Bailey said. "I was having to push back on the lies we were being told consistently. "I am shocked by what we heard at that time about the financial crisis period. "We have to remember that the most important thing is the victims in all of this." Additional reporting by Kevin Peachey and Adam Woods