Bank of England paves the way for a summer interest rate cut as inflation falls to just two per cent

The Bank of England paved the way for a summer interest rate cut yesterday after inflation fell to its 2 per cent target.

Members of the Monetary Policy Committee (MPC) voted by seven to two to leave interest rates at 5.25 per cent.

But the Bank revealed that, though it chose to hold the base rate at a 16-year high, it was a knife- edge decision.

The announcement will revive hopes that the Bank could vote for a cut at the start of August, relieving pressure on millions of borrowers.

It is expected to give a new Labour government an immediate boost should it win the General Election on July 4.

The announcement will revive hopes that the Bank could vote for a cut at the start of August, relieving pressure on millions of borrowers (file image of the Bank of England) 

Julian Jessop, economics fellow at the Institute of Economic Affairs, said the Bank was ‘wrong’ to leave rates on hold.

‘There is already plenty of evidence that underlying cost pressures are easing,’ he added. ‘The longer the Bank waits, the greater the risk that inflation undershoots the target while unnecessarily holding back the recovery.

‘The MPC could have wanted to avoid the perception of bias if they had surprised investors by cutting rates so close to an election.’

Inflation has fallen to 2 per cent for the first time in nearly three years.

Andrew Bailey, governor of the Bank of England, said: ‘It’s good news that inflation has returned to our 2 per cent target. We need to be sure that inflation will stay low and that’s why we’ve decided to hold rates at 5.25 per cent for now.’

The Bank added: ‘As part of the August forecast round, members of the committee will consider all of the information available and how this affects the assessment that the risks from inflation persistence are receding.’

The language is likely to cheer markets after traders were gloomy about the prospect of a summer rate cut because services sector inflation came in at a higher than expected 5.7 per cent.

The MPC played down the figure, noting that it was driven by prices that regularly increase at that time of year such as mobile phone contracts, broadband and water bills.

Another factor being closely watched is wage growth – running at 6 per cent. However, some MPC members also played down that figure. 

The Bank said that for some rate-setters the higher than expected services inflation reading ‘did not alter significantly the disinflationary trajectory that the economy was on’.

And they noted that the strength in wage growth was driven by an increase in the national living wage – something that was ‘unlikely to be as large in future’.

It added: ‘For these members, the policy decision at this meeting was finely balanced.’

It is expected to give a new Labour government an immediate boost should it win the General Election on July 4 (file image of the Bank of England) 

The minutes imply that the MPC could easily be tipped into voting for a cut later this summer.

But they suggest that the decision may be close – and pile pressure on new deputy governor Clare Lombardelli, who is due to join the Bank at the start of next month.

The minutes also add to optimism about Britain’s economic recovery.

After better than expected GDP growth of 0.6 per cent in the first quarter, the Bank has now upgraded its second quarter forecast from 0.2 per cent to 0.5 per cent.