Bank of England keeps rates at 5.25% but says 'things moving in right direction'

It’s a hold.

Inflation is fading fast but the Bank of England’s monetary policy committee (MPC), has decided to sit on its hands for now.

The journey to price-stability continues. The Bank’s target of 2% feels within touching distance and the Bank points towards signs of progress but there is still no sign of interest rate cuts.

The headline rate of inflation which fell to 3.4% last month, is forecast by the Bank to reach its 2% target by May this year.

The Chancellor's decision to freeze fuel duty in his budget could mean the number is even lower than the 1.9% previously forecast.

Jeremy Hunt will be reassured that the Bank is judging the measures he announced this month will slightly boost growth without generating too much inflation.

The Governor is feeling upbeat but says it’s still too early to declare victory, “In recent weeks we’ve seen further encouraging signs that inflation is coming down,” says Andrew Bailey.

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

Following the publication of the Bank’s minutes, markets investors are betting that rates could see a cut as early as June.

The sense here is that interest rates have almost certainly peaked and that the next move will be down, it is just a question of when.

The Bank of England follows the USA’s Federal Reserve and the European Central Bank in leaving rates unchanged, this becomes the fifth time the bank has opted to maintain bank rate at 5.25%, after initially raising it from 5% in August last year.

Last month, the committee was split, this month they’re more aligned. Eight members, including the Governor voted in favour of a hold, one member - Swati Dhingra - voted for an immediate cut.

The Bank’s concern is that although inflation is likely to return to target in the summer, there is a risk it might not stay there.

Bank of England Governor Andrew Bailey speaking after the interest rate announcement on March 21.

The International shocks which propelled prices upwards - the pandemic and Russia’s invasion of Ukraine - have eased, but there’s still some evidence inflation is feeding itself domestically.

Annual wage growth and Service price inflation both stand at 6.1%, levels the Bank is unwilling to tolerate. The concern the Bank has, is that households and firms are trying to reclaim their lost spending power by increasing their pay and profits respectively, financed by an increase in prices.

A summary of business conditions by the bank’s agents, as well as ONS data suggests labour market conditions are loosening, but remain “relatively tight by historical standards," an observation which ultimately played a big part in the decision of MPC members to keep rates at this level.

Most companies in the private sector will make pay awards between January and February. The bank wants to see more evidence that pay is easing before it makes its move.

“Material risks” still remain from attacks on shipping in the Red Sea although the impacts on our economy from them so far, have been small.

The Bank’s objective is to keep applying the appropriate amount of restraint on demand to bring back price stability whilst causing as little pain as possible.

Higher rates are causing distress for households and businesses, particularly to the one and a half million mortgage holders set to refinance this year.

The door to interest cuts is now wide open, but there's no clear sign yet that the bank is preparing to walk through it imminently.

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