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Bank of England deputy says

UK interest rate cut is ‘possible’ this summer

by DD Staff

May 20, 2024

Bank of England

key takeaways

Analysts have diverged over the likelihood of a rebound in inflation later in the year, possibly forcing the Bank to pause its plans for rate cuts.

The Bank of England's departing deputy governor raised the possibility that interest rates in the UK may be lowered this summer, adding to the anticipation that the first decrease in borrowing costs may occur as early as next month.

In reaction to a sharp decline in inflation, Ben Broadbent, the Bank's deputy governor for monetary policy, suggested that borrowing costs might be reduced “sometime over the summer” if the economy develops as anticipated.

Broadbent said the main drivers of inflation over the past two years – the Covid-19 pandemic and the Ukraine war – have faded and the Bank was watching to check whether the longer-term domestic effects on prices would also decline before making a first cut in interest rates.

He said the monetary policy committee’s (MPC) nine members must assess how those “second-round effects” in domestic prices and wages change the course of inflation over the next two years.

Analysts have diverged over the likelihood of a rebound in inflation later in the year, possibly forcing the Bank to pause its plans for rate cuts.

The consultancy Capital Economics has forecast that inflation will fall below the central bank’s 2% target when figures for April are published on Wednesday and tumble to less than 1% before the end of the year.

“This underpins our forecast that the Bank will cut interest rates from 5.25% now to 3% next year, rather than to 3.75% as investors expect,” the consultancy said.

Other analysts expect inflation to bounce back above 3% before the end of the year as persistently high services inflation and wages increases in the financial and business services industry remain high, feeding into higher prices.

Broadbent said: “There is a range of views across the committee on this point. In view of the rarity of events like this over the past, and the associated uncertainty about the future, that’s entirely understandable.

“Whatever the priors of its individual members the MPC will continue to learn from the incoming data and, if things continue to evolve with its forecasts – forecasts that suggest policy will have to become less restrictive at some point – then it’s possible Bank rate could be cut some time over the summer.”

Earlier this month the MPC voted 7-2 to leave interest rates unchanged at their current 16-year high of 5.25%, with Broadbent one of seven members who opted for no change.

The money markets currently indicate that there is a 57% chance that rates are lowered to 5% at the Bank’s next meeting in June, while a cut by August is almost fully priced in.