British interest rates could fall this summer, according to Ben Broadbent, the Bank of England's outgoing deputy governor for monetary policy.
Broadbent indicated that if the economy develops as expected, borrowing costs could be reduced “sometime in the summer” in response to a significant drop in inflation.
The main inflation drivers of the past two years – the Covid-19 pandemic and the war in Ukraine – have eased, Broadbent said. The Bank of England is now monitoring whether the longer-term domestic effects on prices will also diminish before the first rate cut is implemented. The nine members of the Monetary Policy Committee (MPC) are assessing how these “second-round effects” in domestic prices and wages could change the inflation trajectory over the next two years.
Analysts have differing views on the potential for a recovery in inflation later this year, which could impact the Bank's plans for rate cuts. Capital Economics predicts that inflation will fall below the Bank's 2% target and fall to less than 1% before the end of the year, based on April figures. This supports their prediction that the Bank will cut interest rates next year from the current 5.25% to 3%, instead of the 3.75% that investors expect.
Conversely, some analysts expect inflation to rise above 3% before the end of the year due to persistently high services inflation and wage increases in the financial and business services sectors, which could push up prices.
Broadbent acknowledged the differing views within the committee, stating: “Whatever the priors of individual members, the MPC will continue to learn from the incoming data. If things continue to develop as forecast, indicating that policy will need to become less restrictive at some point, then it is possible that bank rates will be cut sometime this summer.”
Earlier this month, the MPC voted 7-2 to keep interest rates unchanged at a 16-year high of 5.25%, with Broadbent among those choosing unchanged. Current money market indicators point to a 57% chance of a rate cut to 5% at the Bank's next meeting in June, with a near-complete cut expected in August.
Michael Saunders, a former MPC member now at Oxford Economics, supports the likelihood of a rate cut in the summer, possibly sooner than the US Federal Reserve. Saunders predicts the Bank of England's MPC will start cutting rates in the summer, with the first cut possible in June or August, and a total cut of 75 basis points by the end of the year. This forecast comes ahead of expected US rate cuts, which are expected to begin in September with a 50 basis point cut by the end of the year.
