interest rates unchanged at 5.25%

There Bank of England still holds keep interest rates at 5.25%, confirming the need to maintain a policy attentive to containing inflation, and does not ensure (nor exclude) a possible rate cut in June. This is what emerges from the end of the two days of monetary policy, in which i bankers were divided about the possibility of proceeding immediately with a reduction in the cost of money.

Fixed interest rates

The Bank of England's Monetary Policy Committee confirmed the key interest rate at 5.25%. A decision voted by a majority of 7 out of 9 memberswhile two bankers had opted for an immediate reduction of 25 basis points to 5%.

“Monetary policy will have to remain restrictive for a sufficiently long period to bring inflation back to the 2% target in a sustainable way in the medium term, in line with the mandate of the Monetary Policy Committee. – we read in the final communiqué – Since last autumn the Committee has considered that monetary policy must remain restrictive for a long period of time until the risk of inflation taking root above the target of 2 has dissipated. %”.

“We are not yet at the point where we can cut rates”the governor said Andrew Bailey in the press conference at the end of today's monetary policy meeting, while defining the most recent inflation data as “encouraging”, he clarified that a rate cut in June “is neither excluded nor certain”.

Inflation close to target

Today's decision to keep interest rates on hold aims to reach the 2% inflation target, but at the same time help support growth and employment.

Twelve-month inflation fell to 3.2% in March from 3.4% in February and expects it to return close to the 2% target in the short term, but increase slightly in the second half of this year, to around 2.5%, due to the fading effects of 'power. Upside risks to the near-term inflation outlook arising from geopolitical factors remain, although developments in the Middle East have so far had a limited impact on oil prices.

According to the projections of the May Monetary Policy Reportinflation is expected at 1.9% in two years and 1.6% in three years.

Growth expected to moderately recover

After last year's modest weakness, the UK GDP will increase by 0.4% in the first quarter of 2024 and by 0.2% in the second quarter, stronger than expected in the February report. This follows, however, weaker-than-expected GDP in the second half of last year, leaving activity at a similar level by the middle of this year as in the February projection.

Also household consumption was weak in the second half of last year, but are expected to recover during 2024, supported by a continued recovery in real incomes. This in turn partly reflects the continued easing of shocks to the prices of energy and other imported goods experienced in recent years, and the effect of the reduction in national insurance contributions. Real after-tax labor income is now expected to grow by more than 3% in full-year 2024-.

It is expected that the policies announced in Spring budgetincluding the further reduction of social security contributions, will increase the level of GDP by more than a quarter of a point compared to the projections of the February Report.

What analysts predicted

According to theUnion Bancaire Privée (UBP) the firepower of the BoE could push the UK markets which are currently quite undervalued. The UK economy is expected to emerge from recession in the coming months. At the same time, projections indicate a decline in the cost of living at 2% on an annual basis, and it is expected to remain in a range between 2 and 2.5% in the coming quarters. This suggests that the BoE is likely to reduce its main interest rate from 5.25% to 4% this year, with further cuts expected in 2025, aiming for a final rate between 3.50% and 3%, 25%.

Even the experts of PGIM Fixed Income, while not ruling out “surprises” from the Bank of England, they think market rates would remain “higher for longer thanks to the resilience of the US economy”, with “signs that cuts are on the way” in the coming months.