UK interest rates could be cut this summer, the Bank of England’s outgoing deputy governor said on Monday, adding to the expectation that a first reduction in borrowing costs could come as soon as next month.
Ben Broadbent, the Bank’s deputy governor for monetary policy, said that if the economy evolves as expected, borrowing costs could possibly be lowered “some time over the summer” in response to a steep fall in inflation.
Broadbent said the main drivers of inflation over the past two years – the Covid-19 pandemic and the Ukraine war – had faded and the Bank was watching to check whether the longer-term domestic effects on prices would also decline before making a first cut in interest rates.
He said the monetary policy committee’s (MPC) nine members must assess how those “second-round effects” in domestic prices and wages change the course of inflation over the next two years.
Analysts have diverged over the likelihood of a rebound in inflation later in the year, possibly forcing the Bank to pause its plans for rate cuts.
The consultancy Capital Economics has forecast that inflation will fall below the central bank’s 2% target when figures for April are published on Wednesday and tumble to less than 1% before the end of the year.
“This underpins our forecast that the Bank will cut interest rates from 5.25% now to 3% next year, rather than to 3.75% as investors expect,” the consultancy said.
Other analysts expect inflation to bounce back above 3% before the end of the year as persistently high services inflation and wage increases in the financial and business services industry remain high, feeding into higher prices.
Broadbent said: “There is a range of views across the committee on this point. In view of the rarity of events like this over the past, and the associated uncertainty about the future, that’s entirely understandable.
“Whatever the priors of its individual members the MPC will continue to learn from the incoming data and, if things continue to evolve with its forecasts – forecasts that suggest policy will have to become less restrictive at some point – then it’s possible Bank rate could be cut sometime over the summer.”
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Earlier this month the MPC voted 7-2 to leave interest rates unchanged at their current 16-year high of 5.25%, with Broadbent one of seven members who opted for no change.
The money markets currently indicate that there is a 57% chance that rates will be lowered to 5% at the Bank’s next meeting in June, while a cut by August is almost fully priced in.
Michael Saunders, a former member of the MPC who left in 2022, said the Bank was likely to start cutting rates in the summer, and sooner than the US Federal Reserve.
Saunders, who is now a senior economic adviser at Oxford Economics, said: “We expect the BoE’s monetary policy committee will cut rates soon, with a narrowly balanced choice between June and August for the first cut and rates falling by 75bps (basis points) by year end. This is a little earlier than our forecast for US easing, with a first cut expected in September and rates coming down by 50bps by year end.”