BoE holds interest rates – but hints at a cut soon

BoE holds interest rates – but hints at a cut soon

12:28 PM, 9th May 2024, About 2 months ago 5

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The Bank of England (BoE) has kept interest rates at a 16-year high of 5.25%, as expected, in a bid to control inflation.

With inflation nearing the bank’s target of 2% – it is currently at 3.2% – a rate cut is anticipated in the coming months.

One member of the nine-person Monetary Policy Committee (MPC) which oversees the rates voted to lower borrowing costs this month, signalling a potential shift.

Though the vote was 7-2 to hold, a previous vote saw an 8-1 hold, suggesting a growing openness to lower rates.

 

Positive economic forecasts

The BoE has also released positive economic forecasts and it expects stronger GDP growth, lower unemployment and inflation compared to its earlier predictions.

Inflation is projected to hit the 2% target soon, with a temporary rise afterwards.

The bank’s Governor, Andrew Bailey, said: “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.”

Won’t wait for the Federal Reserve to cut its rates

The report released by the bank will undoubtedly reinforce the view of economists that the BoE won’t wait for the US central bank, the Federal Reserve, to cut its rates – and could do so in the summer.

Economists are predicting a quarter percentage point cut as soon as next month – others are predicting August.

Also, one of the Bank’s deputy governors, Dave Ramsden, has joined Swati Dhingra in voting for lower interest rates.

Committee watchers say that a change in voting patterns by a senior internal MPC member hints that others on the committee will soon follow.

The MPC’s report says it ‘would consider forthcoming data releases and how these informed the assessment that the risks from inflation persistence were receding.’

‘Bank had some tough choices to make’

Jeremy Leaf, a north London estate agent and a former RICS residential chairman, said: “The Bank had some tough choices to make – on the one hand it can see inflationary pressures easing with the headline figure now at its lowest for two years but on the other, wage growth remains stubbornly high.

“As far as the housing market is concerned, we are finding borrowers increasingly concerned at the uptick in mortgage rates and the delay in what most people expect is a cut in base rate sooner or later.”

He added: “The comments and voting pattern around the decision are sometimes more interesting than the decision itself and clearly the direction of travel for rates is downwards when it is judged the right time to do so.

“The chances of even a small reduction resulting in runaway property prices or a substantial rise in activity are slim, bearing in mind recent fairly flat activity.”

Combat levels of inflation

Nathan Emerson, Propertymark’s chief executive, said: “As interest rates continue to remain the same in order to combat levels of inflation this country has not witnessed for decades, Propertymark is optimistic that buyers will continue to adapt to these new market conditions.

“Our own Housing Insight Report discovered that there has been a 4% increase in the number of potential buyers registered, and an 8% increase in the number of available properties to rent, which shows that there are some reasons to remain optimistic that the housing market is recovering from shock economic factors from the last three years.”

Ben Thompson, the deputy chief executive of Mortgage Advice Bureau, said: “With the Bank of England sitting on its hands again, borrowers will have to wait that bit longer for the first base rate cut since 2020.

“Inflation falling slower than expected has put the brakes on, with policymakers waiting for signs that the cost-of-living crisis has been shaken off – and there may be some way to go yet.”


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Comments

Beaver

10:09 AM, 10th May 2024, About 2 months ago

The Bank of England needs to understand that in an environment in which a high proportion of private rented housing is leveraged and where most landlords are small landlords who are unable to offset their interest payments against their revenues from rent, that holding interest rates up also pushes rents up. As rents climb people who need to live near their work need higher wages to be able to do it.

Whiteskifreak Surrey

11:08 AM, 10th May 2024, About 2 months ago

I would not bet on cutting interest rates anytime soon. Prices of food and other grocery items will very soon go up due to self-imposed trade barriers (aka brexit checks) on all UK imports from the EU. It only started 2 weeks ago so will need some time to feed through to the supermarket shelves. Already shelves are emptier than before 30 April.

Beaver

13:23 PM, 10th May 2024, About 2 months ago

Reply to the comment left by Whiteskifreak Surrey at 10/05/2024 - 11:08
The UK has only just moved out of recession but growth is still sluggish. If people cannot afford to move to take up employment because work (after tax) doesn't pay that is a drag on the economy. Rental costs are about a 1/3 of after tax income. By the time you have allowed for stamp duty land tax or its equivalent in Wales, Scotland or Northern Ireland then often work does not pay. That is especially the case where children and childcare costs are involved....work doesn't pay and many families are better off taking benefits instead.

The way the economy works is that people need rental accommodation to be able to afford to be where they need to be to work or look after their children. The private rental sector is what provides competition to social housing and gives the economy the flexibility it needs to allow people to do this.

Between the actions of the Bank of England in raising interest rates and the policies of the UK governments in squeezing the supply of housing by preventing most landlords from offsetting their increasing finance costs these governing bodies are squeezing the supply of housing and creating further inflationary pressure. Rent controls like those we've seen in Scotland make the situation worse as they exacerbate the restrictions in supply.

The quote in this post says: "“The chances of even a small reduction resulting in runaway property prices or a substantial rise in activity are slim, bearing in mind recent fairly flat activity.”

The reason we have been given historically for being unable to deduct finance costs from rents is to avoid another housing boom. But the truth is the economy needs a boom in energy efficient housing. ...that boom needs to come from being able to retro-fit existing property to be energy efficient. Bulldozing older properties and building new ones because there is no VAT on new build although there is on renovating or retrofitting existing property is itself environmentally damaging.

The Bank of England and the UK governments need to recognise their joint role in driving up inflation and learn from the experience.

Phil Landlord

7:42 AM, 11th May 2024, About a month ago

Reply to the comment left by Whiteskifreak Surrey at 10/05/2024 - 11:08
I think you are long term correct….rates aren’t falling and neither is inflation if we measure this over 3/5/10 year cycles.
However we might see some short term reporting of falls by the guys on Bloomberg and the BBC here and in the US not least because it is election season.

Gold/Silver is starting to sniff this out…it’s rising despite best efforts to keep it down.

You can’t print as much money as we have without inflation….so many confuse inflation with supply/demand etc…but that’s price and price of certain things. That can quickly be reversed. Inflation is a bigger beast.

When you print money like we have the true value of the money decreases and seemingly things go up in price (reality is it’s the value of money falling).

It’s a bumpy ride from now on….the ‘end of an empire’ cycle and we could see changes not even our grandparents lived through.

Cider Drinker

16:50 PM, 11th May 2024, About a month ago

The Government will ensure rates come down prior to an election. It’s an age-old tactic.

Once the election is over, rates could rise again as the U.K. tries to cling on to its credit rating.

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