Graeme Wearden 

Bank of England says it could lower interest rates more than expected, but June cut isn’t ‘fait accompli’ – as it happened

Bank of England governor Andrew Bailey is briefing reporters after BoE left UK interest rates on hold again in a dramatic 7-2 split
  
  

The Bank of England building in London, where the MPC will set interest rates at noon
The Bank of England building in London, where the MPC will set interest rates at noon Photograph: Carlos Jasso/Reuters

Closing post

Time to wrap up….

The Bank of England has signalled it could start cutting interest rates as early as June after inflation was found to be “moving in the right direction”, as it kept borrowing costs on hold at 5.25% for the sixth time in a row.

Alongside the decision to keep rates on hold, the Bank said inflation was already on course to hit its target of 2% and would fall to just 1.6% in two years, opening the door to future cuts in interest rates.

Giving a more upbeat assessment of the economic outlook than in its February report, the Bank also suggested the UK recession had ended, predicting the economy had grown 0.4% in the first three months of the year. The Office for National Statistics will publish the official estimate of growth on Friday [7am, see you there!].

The nine members of the Bank’s rate setting monetary policy committee were split on the decision to hold interest rates, with two members – Swati Dhingra and Dave Ramsden – voting for an immediate cut to 5%. Dhingra was the lone voice calling for a rate cut at the previous meeting of the MPC.

BoE governor Andrew Bailey said he was “optimistic” that things were moving in the right direction.

Bailey told reporters in London that

Stocks in London hit fresh record highs, as investors anticipated an easing in borrowing costs soon.

Here’s the full story:

And our analysis:

Plus here’s the rest of today’s news:

Updated

FTSE 100 ends at new closing high

The sight of the Bank of England inching towards a summer interest rate cut has pushed up London’s major stock index to a new closing high.

The FTSE 100 has ended the day at a new closing peak of 8381 points, up 0.3% today, extending its recent rally.

It had earlier hit a new intraday high of 8396 points.

Anglo American (3%), the mining giant which recent rejected a takeover approach from rival BHP, were the top riser, followed by retailer JD Sports (+2.9%) and grocery tech firm Ocado (+2.3%).

Housing stocks also had a strong day, with home builder Taylor Wimpey up 1.7% and online estate agent Rightmove gaining 2.1%.

Bailey: All meetings are live (including June....)

BoE governor Andrew Bailey has told Bloomberg that ‘all meetings are live’.

And when asked whether a rate cut in June was “likely”, he explains that the Bank has changed on its view on the likely persistence of inflation.

That’s “good news”, he adds.

Bank of England governor Andrew Bailey appears to be closer to voting for a rate cut than the majority of his committee, suggests ING economist James Smith.

Today’s Monetary Policy Report, minutes and press conference have increased the chance of a June interest rate cut in the UK “at the margin”, argues Simon French of investment bank Panmure Gordon.

It was not just the vote - with Dave Ramsden voting for an immediate 25bp reduction - but the Governors’ comments that reinforced the idea of the MPC plotting a narrow path that eases financial conditions yet keeps them on a restrictive setting.

French says its understandable that cracks have appeared within the monetary policy report over how to interpret the latest data. He reckons the UK is about to enter a period where inflation is lower than target, and compared to major rival economies too:

June or August for the first cut remains a coin toss in financial markets, and whilst we stick to our August call it is with low conviction. The timing of the UK inflation cycle has caught many economists and commentators off guard. 2023 saw outsized inflation upsides leading to accusations that the Bank had lost control of the price level.

The UK is now about to enter a period of an inflation undershoot - to both the 2% target and G20 benchmarks - and calibrating monetary policy independently, and informally coordinating with the Federal Reserve is a big challenge.

Updated

Larry Elliott: UK interest rates are close to a descent

The record of this week’s MPC meeting make it clear that it would only take slightly better news on the likely persistence of inflation to persuade some committee members to vote to cut rates in June, my colleague Larry Elliott writes.

Otherwise, the first move downwards will come in August, he explains:

Huw Pill, the Bank of England’s chief economist, said last year that the path of interest rates was likely to mirror the shape of South Africa’s Table Mountain: steep-sided but with a plateau at the summit.

Judging by the Bank’s latest monetary policy report, Pill and the other eight members of Threadneedle Street’s monetary policy committee (MPC) are now only a few short steps from starting their descent from the mountain top. But they are not quite there yet.

Two MPC members – Swati Dhingra and Dave Ramsden – already think interest rates have been held too high for too long, and so voted for the base rate to be cut from 5.25% to 5%. The real question is how long it will take at least three other committee members to join them.

Not that long, judging by the comments from Andrew Bailey, the Bank’s governor. He said the MPC’s wait-and-see faction accepted that the 14 increases in interest rates between December 2021 and August 2023 were “weighing on activity in the real economy” but wanted to see more evidence that inflation would stay low before voting for a reduction.

The money markets are still indicating that a rate cut next month is effectively a coin toss.

According to interest rate probability data on LSEG, there is 55% of no change at the BoE’s June meeting, and a 45% of a cut to 5%.

Modupe Adegbembo, economist at Jefferies, says the Bank’s MPC “remains track to cut over summer”, but is reluctant to pre-commit to cuts, adding:

Rate cuts are coming, but the decision between June and August is close. On balance our base case remains a cut in August, but upcoming data on inflation and wages remain key.

Bank decision: What the experts say

A UK interest rate cut, when it comes, will not give the government much of a feelgood boost, reckons Charles Hepworth, investment director of GAM Investments.

Further out, markets are still pricing in two 25 basis point cuts for this year, and with inflation forecasts at the BoE revised lower, there is more than enough justification to reduce rates soon.

Sadly, it will be too little and possibly too late for the incumbent Conservative party hoping for a feel-good factor boost in the polls that lower rates could bring. We will have lower rates and a different government this year – that much is certain.”

Henry Cook, senior economist for Europe at MUFG, says the Bank has taken “significant strides” towards a summer rate cut today:

The door is wide open for a cut at the next meeting if data on inflation and wage pressures evolve favourably over coming weeks. This data dependent approach was highlighted in the policy statement and further emphasised by Bailey in the press conference. There will be extra market scrutiny on the upcoming CPI and wage releases.

There was a sense that the BoE clearly wants to push back on the recent hawkish repricing of UK rate expectations following hot US data. Bailey – who made several noteworthy remarks today - said that it is likely that the BoE will need to cut rates “over coming quarters”.

He added that the prospect of a rate cut in June should not be ruled out, but neither is it a “fait accompli”. The explicit mention of the possibility of a move in June is significant. Policymakers have laid what looks like sufficient groundwork now for a cut at the next meeting in the absence of upside surprises on inflation or wage growth.

Konstantinos Venetis, global macro director at TS Lombard, says the Bank could be heading for a “less high”-for-longer stance on rates.

Having opened the door for rate cuts back in February and taken a step closer in March, this month the MPC went a bit further.

Although policymakers stopped short of telegraphing imminent action, their communications point to a rising likelihood that June – by which time we will have two fresh CPI readings plus updated job market data – and August are “live” meetings for the first rate cut.

Reuters: Hunt wants 'sustainably lower' interest rates

British chancellor Jeremy Hunt said he wanted “sustainably low interest rates” when asked about the Bank of England’s decision on Thursday to hold rates at 5.25%, Reuters reports.

Hunt told reporters:

“What we want is sustainably low interest rates.

I would much rather that they waited until they’re absolutely sure inflation is on a downward trajectory than rushed into a decision that they had to reverse at a later stage.”

Reuters is reporting that chancellor Jeremy Hunt has said he would rather the Bank of England “took their time”, rather than “having to reverse course”.

IE, by cutting interest rates too soon, and then having to raise them again.

Updated

US jobless claims jump to eight-month high

Newsflash: Away from the Bank of England, there’s been a large jump in the number of Americans signing on for unemployment support.

Initial jobless benefit claims rose by 22,000 to 231,000 in the week to 4 May, data from the US Labor Department shows.

That’s the highest level since last August.

Economists had expected a much smaller rise in new claims, to around 210,000.

It may be a sign that the US labor market is weakening, as high interest rates weigh on its economy.

Bailey: We'll take it meeting by meeting

The press conference ends with an attempt to pin Andrew Bailey down about when the Bank might cut interest rates.

Q: You’ve said that a June rate cut is neither a fait accompli nor ruled out – that suggests a 50:50 chance. Does that mean that a cut by August is more likely?

With his innings almost over, Andrew Bailey resists swishing at this attempt to lure him into an indiscretion.

He says the MPC takes its decisions meeting by meeting, and the Bank will have two more sets of inflation and unemployment data to chew through before its meeting in late June.

Asked about the UK labour market, Andrew Bailey says we are close to full employment at the moment.

He says some firms are holding into labour, because they are concerned about the challenge of finding new staff.

Q: Market expectations of UK interest rates have risen since February. Are you comfortable that as you talk about rate cuts, mortgage rates are rising?

Andrew Bailey repeats his earlier point that recent moves to UK market expectations have been pushed up by events in the US, and that British inflation dynamics are actually different.

Updated

Q: Is the rise in the minimum wage pushing up inflation?

Andrew Bailey says he is picking up “greater doubts” from businesses about passing on higher wage costs.

Q: There’s been a surge in demand for your short-term repo operations, does that mean banks are facing liquidity problems?

Andrew Bailey says that repo programme exists to prevent short-term borrowing costs going up above target.

[The repo operation it allows banks to get cash from the bank, while handing over assets as collateral, ensuring they can retain access to central bank reserves].

Deputy governor Dave Ramsden says the short-term repo (STR) operation is working as it should, explaining:

“There’s always going to be stuff happening in the repo market, but the STR is doing its job.

“We’re not seeing some ratcheting up more in (money market) rates that might make you think ‘Oh right, so reserves are becoming a bit scarce’.”

Updated

Bailey: We never discuss politics when setting rates

Q: A lot of people in Westminster think you should be cutting interest rates – is that helpful, and how do you maintain your independence in the face of that?

Governor Andrew Bailey replies that the Bank of England is independent, with a remit to control inflation.

He confirms that he also hears those noises, but insists:

When we are sitting in the room as an MPC, we never discuss politics.

Our job is to take decisions consistent with our remit, which applies at all times.

Q: Why does your monetary policy report have quite an emphasis on the money growth figures, more than usual? Did you miss a signal from these figures when they were going up, my colleague Larry Elliott asks.

Governor Andrew Bailey says the Bank always looks at these figures, but given recent “commentary” about them, it was helpful to outline the BoE’s thinking.

He says the rate of money growth did rise over its long-term trend during the Covid pandemic, but recently is has weakened and returned to the trend line.

But now it appears to be stabilising, Bailey adds, rather than plunging below it.

Deputy governor Sir Dave Ramsden says there’s clearly a ‘long-term relations’ between nominal economic activity and money, but you can’t extract a short-term signal from it.

[Some economists (especially those with a monetarist bent) have argued that the expansion of the money supply was the cause of the surge in inflation recently.

Milton Friedman famously said inflation is a monetary phenomenon, while Keynes theories show that the economy is best controlled by manipulating the demand for goods and services, rather than targetting the amount of money in the economy]

Updated

Bailey: No law that we can't move before the Fed

Q: There’s a perception in markets that the Federal Reserve will move before other central banks, are you saying that’s not the case?

Andrew Bailey rejects the notion that Threadneedle Street plays second fiddle to the Fed, telling reporters:

There is no law that says the Fed must move first and everyone else, including us, moves afterwards.

Moreover, we have a remit and a target related to domestic inflation in the UK.

Q: The markets are betting on two or three cuts to UK interest rates this year – would that still leave them in restrictive territory?

Bailey says he still agrees that one small cut to Bank Rate would still make it restrictive, but doesn’t really say what two or three would be.

Outgoing deputy governor Ben Broadbent then explains that it would be misleading for the Bank to precommit to exactly what the neutral rate of interest is (where it is neither stimulating nor restricting growth).

Q: Are you frustrated that market expectations for UK interest rates have been affected by what’s been happening in the US? And what do you mean by suggesting you could cut rates faster than markets expect?

Andrew Bailey takes the questions backwards.

He points out that the Bank’s latest inflation forecasts show CPI falling to 1.6% in three years time – below its target. Those forecasts are based on market expectations for interest rates (implying that those market expectations are too high).

Bailey then agrees that recent market movements have been dominated by movements in the US markets (where inflation has been stickier than expected).

Bailey says the UK situation is different than in the US; there has been some decoupling in market rate expectations recently.

Why two Bank doves voted for a rate cut today

Then a question for deputy governor Sir Dave Ramsden, one of two policymakers who voted to cut rates today:

Q: Are you taking the judgement that the Bank is inflicting unnecessary damage on the economy by keeping rates at their current level?

Ramsden swerves the opportunity to criticise his colleagues on the MPC, saying he will outline his thinking in future speeches in a few weeks.

He points us to paragraph 22 of the minutes of today’s meeting, which explain his and Swati Dhingra’s reasons for voting to cut rates to 5%.

That paragraph says:

Two members preferred a 0.25 percentage point reduction in Bank Rate at this meeting.

For these members, Bank Rate needed to become less restrictive now to enable a smooth and gradual transition in the policy stance, and to account for lags in transmission. Consumer price inflation was already, and had been for some time, on a firm downward trajectory. The latest forecasts showed inflation returning close to the target in the short term, and this was consistent with forward-looking indicators of output price inflation falling behind input price inflation.

As the outlook for demand remained subdued, with vacancies continuing to fall and nominal pay growth easing, the risks to inflation returning sustainably to the target in the medium term were to the downside.

Updated

Onto questions….

Q: The minutes of this month’s meeting underline the importance of upcoming data – would you feel comfortable advocating a rate cut in June if the data is inline with forecasts?

Governor Andrew Bailey says that even if the data is entirely in line with forecasts, the Bank must judge whether that means the risks to inflation persistence are receding.

He then repeats that a June rate cut is ‘not a fair accompli’, but each meeting is a new decision.

Bailey adds that the Bank has “no preconceptions” about how fast or how far it might cut interest rates.

Instead, he says the Bank will focus on the data, and “look carefully” for signs that the outlook for inflation is consistent with the 2% target.

Bank: We could cut rates faster than City expects

The Bank of England could cut interest rates faster than investors expect, governor Andrew Bailey declares.

He tells reporters in London that interest rates are likely to be cut “in the coming quarters”, to avoid inflation falling sharply below its 2% target.

Bailey says:

With the progress we have made, to make sure that inflation stays around the 2% target, and is neither too high nor too low, it is likely that we will need to cut bank rate over the coming quarters and make monetary policy somewhat less restrictive over the forecast period.

Possibly more so than currently priced into market rate.

Before today’s meeting, investors expected two cuts to UK interest rates this year; they’re now pricing in slightly more easing than that.

Updated

The Bank has made two important changes to its judgement on inflation, Andrew Bailey says.

It now believes that more of the rise in import costs has now fed through to consumers – meaning external pressures will be weaker.

It also believes “second-round effects” – where inflation leads to higher wages and prices – will fade faster.

Bailey: June rate cut is not ruled out, nor a fait accompli

Newsflash: Governor Andrew Bailey has declared that the Bank is neither ruling out, nor ruling in, a rate cut at its next meeting in June.

Bailey then explains that the Bank should receive two inflation and labour market reports before it next sets interest rates.

That data will help show if inflation is moving sustainably to the Bank’s 2% target.

Bailey declares:

Let me be clear, a change in Bank Rate in June is neither ruled out nor a fait accompli.

BoE governor Andrew Bailey says there’s been an absence of data surprises recently – a sign that we are returning to more normal economic times.

Despite geopoliticial risks, Bailey says global supply chains have held up, energy prices have moderated.

Bailey also doesn’t sound too concerned about recent higher-than-expected wage and services inflation data. Such data has been “well within” normal volatility levels.

Bank of England press conference begins

The Bank of England is briefing reporters now at its headquarters in London.

Governor Andrew Bailey is explaining that “the big global shocks” that drove up inflation have faded.

UK inflation has now fallen close to 3%, he says, and is expected to be close to the Bank’s 2% target in the coming months. “That’s encouraging”, Bailey says.

But, the Bank isn’t yet confident enough to start cutting interest rates, and will consider upcoming economic data as it weighs up whether to ease policy.

FTSE 100 hits new alltime high

Boom! Britain’s blue-chip share index has climbed to yet-another record high.

The FTSE 100 index jumped to 8394 points, up 50 points or almost 0.5%

Investors are cheered by the prospect that the Bank of England appears to be on track to start cutting interest rates this summer.

The FTSE 100 has hit a series of highs in the last couple of weeks, and is now up over 8% so far this year.

Here’s a handy chart from the Bank’s latest Monetary Policy Reports, showing how it has revised up its growth forecasts a little, while still expecting unemployment to rise and inflation to fall:

BoE governor 'optimistic' things are moving in the right direction

Bank of England governor Andrew Bailey said he was “optimistic that things are moving in the right direction” – likely a hint that a rate cut is getting closer.

Bailey said the committee voted to wait and see after a majority agreed they needed to see more evidence that inflationary pressures will remain subdued.

In a statement, after the Bank left interest rates on hold today, Bailey says:

“We’ve had encouraging news on inflation and we think it will fall close to our 2% target in the next couple of months.

“We need to see more evidence that inflation will stay low before we can cut interest rates. I’m optimistic that things are moving in the right direction.”

The minutes of this week’s meeting show that Bank policymakers were far from united about the situation.

Even among the seven MPC members who voted to hold rates, there was “a range of views” about the risks to the inflation outlook.

There was also “a range of views about the extent of the evidence that was likely to be needed to warrant a change in Bank Rate” – which indicates that some are closer to voting for a cut than others.

As covered at noon, deputy governor Sir Dave Ramsden has seen enough – choosing to join the MPC’s most dovish member, Swati Dhingra, in voting for a rate cut.

Updated

Bank trims inflation forecast

The Bank of England still expects inflation to pick up towards the end of this year, but not by as much as it did three months ago.

It says today:

CPI inflation is expected to return to close to the 2% target in the near term, but to increase slightly in the second half of this year, to around 2½%, owing to the unwinding of energy-related base effects.

There continue to be upside risks to the near-term inflation outlook from geopolitical factors, although developments in the Middle East have had a limited impact on oil prices so far.

Back in February, the Bank predicted that inflation would rise to around 2.75% by the end of 2024, so this is a welcome downward move.

Bank: UK is out of recession

The Bank of England also predicts that the UK economy returned to growth in the first quarter of this year, after shrinking in the third and fourth quarters of 2023.

The MPC says:

Following modest weakness last year, UK GDP is expected to have risen by 0.4% in 2024 Q1 and to grow by 0.2% in Q2. Despite picking up during the forecast period, demand growth is expected to remain weaker than potential supply growth throughout most of that period.

A margin of economic slack is projected to emerge during 2024 and 2025 and to remain thereafter, in part reflecting the continued restrictive stance of monetary policy.

We’ll learn at 7am tomorrow if they’re right, when the official GDP report for the first quarter of the year is released.

Bank of England votes 7-2 to leave rates on hold

Newsflash: the Bank of England has left UK interest rates on hold at 5.25% for the sixth time in a row.

As widely expected, the BoE resisted pressure to cut rates from their current 16-year high, even though UK inflation has slowed to 3.2% (in March).

But the decision is not unanimous. The nine members of the Monetary Policy Committee were split, with seven voting to hold rates and two voting to cut to 5%.

The Bank says:

The Chair invited the Committee to vote on the proposition that Bank Rate should be maintained at 5.25%.

Seven members (Andrew Bailey, Sarah Breeden, Ben Broadbent, Megan Greene, Jonathan Haskel, Catherine L Mann and Huw Pill) voted in favour of the proposition. Two members (Swati Dhingra and Dave Ramsden) voted against the proposition, preferring to reduce Bank Rate by 0.25 percentage points, to 5%.

Updated

Tension is creeping higher in the City as clocks tick towards noon, and the Bank of England’s interest rate decision….

"Absolute chaos as usual" at Barclays AGM

If Barclays thought it was going to get some respite from protesters by holding its AGM in Glasgow this year, it was wishful thinking.

Within minutes of chairman Nigel Higgins starting to address the shareholder meeting, he was interrupted by shouting shareholders raising concerns about Barclays’ alleged financing and support for companies that activists say are supporting Israel’s attack and oppression of Palestinian citizens, including in Gaza.

An exasperated Higgins started to ask for security to forcibly remove protesters disrupting the meeting:

“We’re totally prepared to discuss and answer questions, but there is no point in engaging in megaphone diplomacy…In the interests of pursuing the business of the meeting, we will have to ask people to leave.”

Climate protesters followed shortly after, swiftly interrupting Higgins and Barclays chief executive CS Venkat as he took the stage.

Beau O’Sullivan, an individual shareholder who also represents climate campaign group Bank on our Future, is in Glasgow and told the Guardian:

“The AGM is absolute chaos as usual. Dominated by calls from activists to stop funding bombs in Gaza and big oil, the board looks incredibly uncomfortable in their seats.”

Updated

A June cut to UK interest rates is likely but far from certain, says Professor Costas Milas, of the University of Liverpool’s management school.

He explains:

The MPC decides on interest rates by looking at the inflation outlook two years down the road. The MPC’s 2-year inflation forecast (based on market expectations of interest rates) is 2.3% for Q1 2026. The public, however, expects inflation to be 2.8% in 2026Q1.

Based on my own calculations, public expectations of inflation predict current inflation better than the BoE’s inflation forecasts: on average, the former have underestimated, since 2011, actual inflation by 0.3 percentage points per annum; the latter have underestimated by a massive 0.98 percentage points per annum!

I feel the Bank will wait for public expectations to start dropping substantially (the next public attitudes report, for May, will be published in June!) before cutting. In other words, the MPC will consider the latest available public expectations of inflation report before cutting interest rates in June!

Spain's BBVA goes hostile with $13bn bid for TSB-owner Sabadell

Investors are watching drama unfold in Spain’s banking sector.

A €12.2bn euro (£10.5bn) bid by BBVA for rival and TSB-owner Sabadell has turned hostile, in a rare move for the European banking industry, where M&A strategies tend to be less…well… aggressive.

It comes after Sabadell rejected BBVA’s original all-share offer on Monday, saying it significantly undervalued the bank and its “standalone prospects”.

BBVA said it had no room to up its offer - which would bring together the third and fourth largest Spanish banks in the market, creating a new enlarged entity that would have the largest domestic balance sheet in the Spanish market (but it would still sit behind Santander, which has a more global portfolio and would remain the country’s largest banking group).

But BBVA is now trying to circumvent the board by taking the same offer (an exchange of one newly issued BBVA share for every 4.83 of Banco Sabadell) straight to Sabadell investors. That represents a 30% premium against the closing prices of both banks on April 29th; and a 50% premium over the weighted average prices of the past three months.

If approved, Banco Sabadell shareholders would hold a 16% stake in the new group, though it’s unclear what that might mean for UK high street bank TSB, as the combined leadership assess the future direction of a new, larger Spanish lender.

BBVA chair Carlos Torres Vila said:

“The transaction will also benefit all remaining stakeholders…the creation of a stronger, more profitable institution will also result in more financing for companies and families and a greater contribution via taxes. All of this will translate into greater economic and social progress.”

Updated

Over in Ireland, inflation has dropped again.

Ireland’s Consumer Price Index (CPI) rose by 2.6% in the year to April, down from 2.9% in March.

Core inflation, which strips out energy and unprocessed food, was 3.5% in the year to April, down from 4.1% a month earlier.

Home repossessions rise as higher interest rates hit households

In a worrying signal from the UK housing market, the number of properties being repossessed has jumped by a third at the start of this year.

Trade body UK Finance has reported that 870 homeowner-mortgaged properties were repossessed in the first quarter of 2024. That is 36% higher than in the previous quarter and 9% higher than in Q1 2023.

In addition, 600 buy-to-let mortgaged properties were taken into possession in the first quarter of 2024, 20% more than in the previous quarter.

UK Finance says the increase is largely due to historic arrears cases now working through the court system, adding that possessions numbers remain very low compared to historic norms.

More borrowers have fallen into arrears on the their mortgages too, squeezed by higher interest rates.

There were 96,580 homeowner mortgages in arrears of at least 2.5% of the outstanding balance in the first quarter of 2024, 3% more than in the previous quarter and 26% more than a year ago.

Also, 13,57 buy-to-let mortgages-holders were in arrears – a 93% jumped on last year.

Charles Roe, director of mortgages at UK Finance, says:

“The number of mortgages in arrears, while still low, continues to rise as households remain under pressure from the cost of living and higher interest rates.

“Lenders offer a range of support to anyone worried about their finances, with teams of trained experts ready to help. If you are struggling, please reach out to your lender as soon as possible to discuss the support options available.”

Updated

With the Bank of England likely to hold Bank Rate at 5.25% at noon today, economists at RBC Capital Markets say the main thing to look for is how the MPC ‘set up’ the prospect of a rate cut at subsequent meetings.

They explain:

The Bank has clearly signaled that the next move in Bank Rate will be down without giving much indication of when that move is likely to come. Yet despite Governor Bailey’s attempt in the wake of the March meeting to indicate that this meeting and the next one in June were ‘live’ the market is currently only pricing around half a full 25bps rate cut over the next two meetings.

There are two ways that the Bank can make clearer that a first rate cut is imminent, the add:

Language – at present the MPC’s guidance is not, in our judgement, consistent with an imminent cut to Bank Rate with an emphasis on how long policy needs to remain restrictive to deal with “persistent inflationary pressures”. At the very least that would need to change to a formulation that expresses greater confidence that the risks to persistence in inflation are receding.

Vote split - our best judgement is that the MPC will split 2-7 on this occasion with two votes for a rate cut. More significantly we think that internal MPC member Sir Dave Ramsden, on the back of his recent speech, is the one most likely to join serial dovish dissenter Swati Dhingra in voting for a rate cut.

A cut to the Bank of England’s base rate should lead to cheaper loans and mortgages, assuming lenders pass it onto their customers.

So it’s not surprising that the UK’s National Association Of Property Buyers hope the BoE will start cutting “very soon”.

Spokesman Jonathan Rolande argues this would lift optimism in the housing market:

Yes, prices are still high, rents too. But the signal of a rate reduction would encourage lenders to reduce their own recently increased lending rates and allow more first time buyers to get out of the rental trap.

It would encourage developers to borrow and to build. Without a rate cut this month, or very soon, the market looks set to stagnate this winter.

Something that isn’t good news for anyone in the property sector or the country.”

The BBC’s Faisal Islam says the Bank of England should provide “some clues” as to the path of interest rates, or the timing of future cuts.

He also points out that Sweden’s central bank cut its rates yesterday, while the Federal Reserve has indicated its rates will stay higher for longer.

Tax rises inevitable after UK election unless fiscal rules are ripped up, says thinktank

The next government will be forced to hit voters with post-election tax rises and delay net zero investment unless it is prepared to rip up Treasury rules for managing the state finances, a leading thinktank has said today.

The National Institute for Economic and Social Research (Niesr) called for a radical overhaul of the self-imposed constraints imposed on government borrowing and debt as it warned that persistently weak growth and lower inflation would make hitting the rules more difficult.

In its quarterly health check, the thinktank said the economy had emerged from recession but the “not-fit-for-purpose” fiscal rules meant there was no scope for Jeremy Hunt to offer fresh tax cuts before polling day.

After the general election, Niesr said a future chancellor would be faced with a choice: raise taxes to maintain the existing provision of public services or rewrite the rules so that they served the UK’s medium- and long-term needs and objectives – including raising the growth rate, levelling up the regions and greening the economy.

More here.

The pound is slightly lower this morning, dipping by a quarter of a cent to $1.2472 against the US dollar.

It could be more volatile when the Bank of England announces its decision on interest rates at noon, as Fiona Cincotta, senior financial market analyst at City Index, explains:

“The pound is falling for a third straight day amid US dollar strength and ahead of the Bank of England interest rate decision.

The central bank is widely expected to keep interest rates at 5.25% but could start to prepare for a rate cut in the coming months. Inflation in the UK was 3.2% in March YoY and is expected to continue cooling towards the central bank’s target of 2% in April.

The market will be watching to see whether the Bank of England lowers its inflation forecasts, adopts more dovish forward guidance, or considers potentially cutting rates.

In the March Bank of England meeting, the vote split was 8 to 1. This vote split could become more dovish in this meeting. Several policymakers, including Sir David Ramsden, have suggested in recent speeches that they could be moving towards a position where they’re comfortable cutting rates. A more dovish rate vote split of two or more waiting for a cart could point to a sooner rate cut from the central bank.

In the media world, ITV has blamed last year’s US writers’ and actors’ strike for a drop in revenues at its production arm.

ITV Studios revenues fell by 16% to £382m in the first quarter of this year, down from £457m in Q1 2023.

ITV says this is due to last year’s US industrial action, which disrupted production, and weaker demand from free-to-air broadcasters in Europe who are reluctant to spend until there is more certainty.

But ITV sees better times ahead, with the UEFA European Football Championship expected to boost ad spending in June. That means total ITV Studios revenue for this financial year are expected to be broadly flat.

Adam Vettese, analyst at investment platform eToro, says

Even with overall revenue down, it seems the message is not to panic as most of ITV’s releases are weighted to H2 and the Euros are coming up in the summer which will give a much needed boost to the coffers in terms of viewer numbers and in turn advertising revenue. Investors may be a little wary though as the firm heavily relies on this pipeline of shows to offset this sluggish start to the year, hampered by the US writers’ and actors’ strikes.

“More and more we consume our viewing content on streaming services online and ITV has made some marked improvements in this area with ITVX also a bright spot with growth in online ad revenue there.

“ITV says the 2026 KPIs are still on track and this was enough to give the shares a boost back in March, despite a dip in revenue. The question is at what point do they need to actually deliver in order for investors to keep the faith? Shares are up 20% this year and have started positively this morning, piling on the pressure for the next update.”

Shares in ITV are up 2.2% this morning, one of the top risers on the FTSE 250 share index of medium-sized firms.

Markets currently think it’s a coin toss whether the Bank of England cuts interest rates in June, but this rises to a roughly three in four chance priced in by August.

Laith Khalaf, head of investment analysis at AJ Bell, says further falls in UK inflation this spring could add the pressure on the Bank.

Also, the European Central Bank could cuts its key policy rates at the start of June, which would create some ‘safety in numbers’ for the BoE to follow.

Khalaf says:

“It’s almost certainly too early for the Bank of England to pull the trigger on a rate cut right now, especially against the backdrop of a more hawkish US central bank.

However, two important things occur before the UK interest rate decision on 20th June. One is the ECB policy decision in early June, where it is widely expected to cut rates, which would roll the pitch for similar action from the Bank of England. The other is more inflation readings for April and May, where CPI could get very close to, or possibly even hit, the Bank’s 2% target.

The closer the inflation dial gets to 2%, the greater the pressure on the Bank of England to take their foot off the brake and cut rates.

Updated

Upbeat China trade data cheers City ahead of BoE decision

Trading is calm in the City this morning, as investors await the Bank of England interest rate decision at noon.

The FTSE 100 share index is currently up just 1 point, or 0.02%, at 8355 points – yesterday it hit a new intraday high of 8365 points.

Traders have been cheered by encouraging trade data from China early today, which showed both exports and imports returned to growth year-on-year in April.

Susannah Streeter, head of money and markets at Hargreaves Lansdown, says investors are hoping for fresh signals from the Bank of England about a summer interest rate cut.

The FTSE 100 hasn’t been knocked off its course with positive winds still largely blowing around the index.

Although there will be a certain amount of treading water ahead of the interest rate decision from the Bank of England, upbeat trade data from China is keeping optimism flowing. Exports grew by more than expected in April, increasing by 1.5% as customers in key markets around the world demonstrated more appetite for Chinese made goods.

This has not only sparked fresh hopes of a steadier recovery for China’s economy, but also may be seen as a measure of more confidence in other economies where interest rate cuts are eyed on the horizon.

The Times runs a “shadow monetary policy” commitee, made up of nine senior economists (including some former members of the actual MPC).

It has ‘voted’ to leave interest rates on hold today, but two of its nine members think the Bank should cut today (and one pushed for a rise).

The shadow MPC also argue the BoE should consider loosening policy at its next gathering in June if inflation and wages continue to ease. More here (£).

Five reasons the Bank of England may cut rates today

Katharine Neiss, chief European economist at PGIM Fixed Income, argues that it is “not beyond the realm of possibilities” that the Bank could cut interest rates today.

Neiss gives five reasons why this week’s meeting is “likely more finely balanced” than the market expect":

  1. First, the Monetary Policy Committee (MPC) does not mind surprising markets. We saw this back in November 2021, when the market was expecting the Bank to hike when ultimately it chose to keep rates unchanged. It subsequently raised rates at its December meeting. The point is, the Bank doesn’t feel the need to precision-steer markets to the timing of rate changes.

  2. Second, the BoE was raising rates much earlier than either the Federal Reserve or European Central Bank in the latest hiking cycle. That means that, other things equal, they can cut earlier too.

  3. Third, some of the last interest rate rises put through by the Bank were on the back of the mini-budget fallout in the autumn of 2022. Now that some distance has been put between that episode and today, those insurance hikes could be taken out while still keeping rates in restrictive territory.

  4. Fourth, inflation in April could well be at or just below the Bank’s 2% inflation target due to strong energy-related base effects. It could look odd for the Bank to remain on hold against a backdrop of inflation back at target, and risks the MPC being tagged as too late on the way down as well as on the way up.

  5. Finally, May is a forecast month. Though MPC members, including the Governor, have been at pains to stress that ‘all meetings are live’, a forecast publication month does allow more space for the Bank to communicate its views and outlook. Market rates are now expected to be high for longer on the back of a resilient US economy, putting inflation and activity lower over the MPC’s forecast horizon and offering yet another signal that cuts are on their way.

Surveyors: high mortgage rates are deterring house buyers

The number of homes for sale in the UK rose in April, but recent rises in mortgage rates started to deter would-be buyers, according to the latest report from surveyors.

The Royal Institution of Chartered Surveyors (Rics) said more of its agents had reported a rise in new instructions by sellers than at any point since September 2020, when the post-Covid bounce was still in effect.

It said this boost in listings suggested people were feeling more comfortable about entering the market.

However, at the same time, recent increases in mortgage rates have slowed buyer demand.

Although the start of the year saw a flurry of mortgage rate cuts, costs have been edging up in recent weeks.

Rightmove’s latest weekly snapshot of the mortgage market showed that the average interest rate on a five-year fixed-rate mortgage had gone above 5% for the first time since January, and that, at 5.02%, the cost was higher than the 4.56% recorded a year ago.

Two-year fixed rates are also typically more expensive than in May 2023, with the average up from 4.84% to 5.41% this week.

Simon Rubinsohn, chief economist at Rics, said:

“Feedback to the latest Rics survey demonstrates the sensitivity of the sales market to interest rates at the present time, given the continuing challenge around affordability.

“A modest back up in mortgage pricing has contributed to the flatlining in the buyer enquiries metric over the past month, as well as the slightly more cautious signals around near-term expectations.”

Rics said reports were mixed around the country, and that “a notable loss of momentum” was mainly being seen in London and parts of the south of England.

These are the parts of the country where prices are highest, and small increases in mortgage rates will be felt most by buyers.

Updated

The BoE is also under some political pressure to start cutting interest rates soon, as falling borrowing costs would help Rishi Sunak argue that the economic picture was brightening.

Back in March, Sir Geoffrey Clifton-Brown, a senior Conservative MP, said the Bank should move to cut rates to boost economic growth.

As my colleague Phillip Inman wrote last weekend:

In an election year, the government might feel more of a sense of urgency about a reduction. After the historic swing against the Conservatives in the Blackpool South byelection and the loss of many council seats, a return to some kind of normal economic progress is considered by many ministers to be their best hope in the battle with Labour.

With inflation forecast to fall below the 2% target as early as next month, pressure on the Bank to cut rates, and by more than once this year, is likely to intensify as Tory frustration grows.

The independent Bank will be more focused, however, on the dismay among businesses and mortgage-payers needing to refinance their loans. If consumer and business confidence, which has improved in recent months, goes into reverse, the economy will suffer and dramatic cuts in interest rates will be needed to spur a revival.

How Bank policymakers are split over when to cut rates

The Bank’s policymakers do appear split on when to cut rates, judging by their recent comments.

Last month, deputy governor Dave Ramsden declared that he has become “more confident” that domestic inflation pressures are receding. Ramsden argued that UK inflation could hold around the Bank of England’s 2% target for the next three years, rather than rising at the end of this year as the Bank had expected.

Governor Andrew Bailey predicted “quite a strong drop” in the next inflation reading.

But other policymakers have sounded more cautious.

Huw Pill, chief economist, argued in April that “the time for cutting bank rate remains some way off.”

And external policymaker Megan Greene has said that the UK wage growth and services inflation “just aren’t consistent” with keeping inflation sustainably at the 2% target.

Reuters has more details here.

Introduction: Bank of England sets interest rates at noon

Good morning, and welcome to our rolling coverage of business, the financial markets, and the world economy.

Britain’s central bank could inch closer to its first cut in interest rates since the start of the pandemic today.

The Bank of England is widely expected to leave interest rates on hold at its latest monetary policy committee (MPC) meeting. But the MPC may also give hints about how soon it will start to lower rates from their current 16-year high of 5.25%.

As inflation dropped to 3.2% in March, nearer the Bank’s 2% target, policymakers can have some hope that price pressures are easing; headline inflation is expected to soon fall below 2%.

But wage growth – last clocked at 6% year-on-year – appears to be too high for the Bank’s comfort.

The BoE will release its latest economic forecasts at noon, alongside the interest rate decision, followed by a press conference 30 minutes later.

This morning, the money markets suggest there’s just a 5% chance of an interest rate cut today, with a 95% likelihood that the MPC leaves rates on hold.

But today’s decision may not be unanimous. At the last meeting, in March, the MPC voted by a majority of 8–1 to maintain Bank Rate at 5.25%; could a second dove join policymaker Swati Dhingra and vote for a cut?

Karen Ward, chief market strategist for EMEA at J.P. Morgan Asset Management, argues that the Bank should look through short-term dip in inflation and not cut rates today.

Ward explains:

“With real wages returning to positive growth, the economy appears to be gaining momentum. That means the current dip in inflation we’re seeing is likely temporary, with a possible resurgence on the cards for the second half of the year.

“By late summer, the Bank of England may have more evidence of easing underlying pressures. However, for now, I think it should communicate that its target is medium-term and, just as it looked through 10% headline inflation, it should also look through a short-term dip in inflation.”

Looking further ahead, the money markets currently expect the Bank’s first cut to come by August, with a second likely in November or December.

But some City economists believe the Bank could cut rates as soon as June.

Kathleen Brooks, research director at XTB, says:

The market is expecting the first rate cut from the BOE between June and August. If the BOE does intend to cut rates next month, then we would expect to get a clear indication from the Bank on Thursday that this could happen.

Conversely, if the Bank pours cold water on a June rate cut, the market could be disappointed, sterling may rally, and UK Gilt yields could rise, Brooks adds.

The agenda

  • 11am BST: Ireland’s inflation data for April

  • Noon BST: Bank of England interest rate decision

  • 12.30pm BST: Bank of England press conference

  • 1.30pm BST: US weekly jobless claims

  • 5.15pm BST: Virtual Q&A with Bank of England chief economist Huw Pill

Updated

 

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