UK interest rates remain at a 16-year high of 5.25%

The Bank of England has opted to leave interest rates unchanged at 5.25%, marking the sixth consecutive meeting at this high level in 16 years.

However, there are signals from the central bank that point to a possible shift towards a rate cut, possibly as early as June.

Andrew Bailey, the governor of the Bank of England, hinted at a possible rate cut in the near future, citing more positive developments in inflation trends. Dave Ramsden, the deputy governor, along with Swati Dhingra, an external MPC member, voted for a 0.25 percentage point rate cut, citing a solid downward trajectory in inflation.

Although the decision to keep rates stable was taken at this meeting, the MPC stressed that if incoming economic data continues to support the trend of declining inflation, rate cuts could be considered at the June or August meetings. The move could provide relief to homeowners and boost demand in the housing market.

Speculation surrounding the Bank’s interest rate reduction strategy has had an impact on mortgage rates. Forecasts indicate that the Bank will cut interest rates twice this year, each in quarter-point increments. Rishi Sunak, the Prime Minister, is counting on a gradual reduction in interest rates to support the Conservative Party’s general election campaign, scheduled for this autumn.

The Bank of England initially raised interest rates significantly in response to rising inflation, peaking at 11.1% in October 2022. However, inflation has since fallen to 3.2%, prompting interest rate adjustment considerations.

While the Bank remains cautious and waits for more evidence of persistently low inflation before making rate cuts, there is optimism that inflation will approach the 2% target in the coming months. However, downward pressure on inflation from lower energy costs is expected to diminish over time.

Despite possible interest rate cuts, the Bank emphasized the need for a restrictive monetary policy to ensure long-term inflation stability. Forecasts for the UK economy indicate modest GDP growth, with unemployment expected to rise to a peak of 4.9%.

Ultimately, seven members of the MPC, including Bailey, Pill and Broadbent, voted to keep the UK base rate at 5.25%, underscoring the Bank’s cautious approach amid changing economic conditions.