The Bank of England decided to wait for interest rate cuts, even though inflation is falling faster than expected.
The UK’s Monetary Policy Committee (MPC) decided to hold interest rates steady at its March meeting ending on Thursday. Rates in the United Kingdom remain at their 16-year high at 5.25%.
Eight out of nine members of the committee voted to keep rates stable, with only one vote going for a cut. This is the first time no member voted for a raise since 2021.
The decision came after inflation fell to its lowest level since September 2021 in February. Prices dropped to 3.4% year-on-year, beating market expectations of 3.5%.
Inflation still remains far above the Bank of England’s target of 2%, but has been steadily dropping in the second half of 2023. Nevertheless, it also remains higher than the Eurozone’s 2.6% inflation.
Despite being on a clear path to the target, the BoE preferred to wait for another meeting for the pivot. Markets widely expect the first rate cut to take place in June.
The committee cited volatile consumer prices, especially food and energy, as the reason to wait for rate cuts. The MPC also noted the worsening situation in the Red Sea could further disrupt global trade and harm British businesses.
A struggling economy
Leaving interest rates so high for so long had significant effects on the British economy. After a stagnating 2023, the UK officially entered a recession in Q4 after two consecutive quarters of GDP contraction.
The UK and Germany are the only major economies tipping into a recession so far.
This was a major blow to Prime Minister Rishi Sunak’s electoral campaign. Sunak became PM after over a decade of Conservative rule, taking the reins after the disastrous tenure of Liz Truss.
Rishi Sunak must call for elections by January 2025. Polls have persistently shown a landslide victory for the opposing Labour Party, which has not led the country since 2010.
At the beginning of his tenure, Sunak pledged to improve the economy but failed to achieve his objective. The UK government now says 2024 will see a “return to growth”.
A major component of this growth will be cutting interest rates. According to many, waiting until June for the pivot was a mistake. “The Bank of England remains overly cautious on the prospect of rate cuts,” Suren Thiru, the economics director at the accountancy body ICAEW said, “given the startling inflation slowdown and an economy in recession, increasing the risk they prolong our economic struggles by keeping policy too tight for too long.”
The BoE aligned with other major central banks, waiting for a pivot rather than risking inflation tipping up again. At the moment, however, the latter prospect seems very unlikely.
