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 fact that Bailey said he was optimistic things were “moving in the right direction” suggested the first reduction in official borrowing costs since the start of the Covid-19 pandemic could be announced at the MPC’s next meeting in June. A move next month “is not ruled out but it is not a fait accompli”, the governor said.
The latest set of official cost of living figures, due out later this month, will add to the pressure on the Bank to relax its policy stance. Annual inflation is expected to have fallen from March’s 3.2% reading to somewhere close to the government’s 2% target in April. While Dhingra and Ramsden think there is a risk of overkill, the other seven members of the MPC are more cautious and worry that price pressures could linger. They will be monitoring three indicators – the amount of slack in the labour market, the level of annual earnings growth and inflation in the service sector – to judge whether inflation has returned sustainably to its target.
The minutes of the latest MPC meeting suggest there are differences of opinion between those currently voting to keep rates on hold. As the record of the meeting makes clear, it would only take slightly better news on the likely persistence of inflation to persuade some committee members – including Bailey – to switch to the rate-cutting camp in June. Otherwise, the first move downwards will come in August.
The City would have been surprised had official borrowing costs been reduced on Thursday, and in the three months since the Bank’s last monetary policy report it has come to the conclusion that rate cuts will come later and more slowly than it was previously anticipating. The financial markets now see rates at 3.75% in three years’ time, compared with the 3.25% they were expecting in February.
That view may well change in light of Bailey’s comments that there would need to be a number of rate cuts to prevent inflation undershooting its 2% target. Having ascended the Table Mountain at a rapid rate, the MPC will take the descent at a more leisurely pace but at a faster lick than the City had been assuming.
