The Bank of England’s monetary policy committee (MPC) will announce its latest interest decision at midday tomorrow (Thursday, May 9). No need to wait, I can already tell you what it’s going to say.
The MPC will continue to hold base rate at its 16-year high of 5.25 percent, just as it has at every meeting since last August. That’s eight months ago now.
Many reckon the MPC should have started cutting rates months ago, including the Bank’s own former chief economist Andy Haldane, who would have cut rates before Christmas.
Mr Haldane is respected as the only member of the MPC who did not fall victim to its mindless groupthink. Sadly, he’s long gone.
Two members of the nine-strong committee have been regularly voting to increase rates, as if the Bank hadn’t done enough to strangle the life out of the UK economy.
We urgently need a rate cut to ease the pressure on businesses and consumers, but don’t hold your breath.
We won’t get one tomorrow.
MPC members are still worried about inflation, even though it has tumbled from a peak of 11.1 percent in October 2022 to just 3.2 percent in March.
The Bank has a target of keeping inflation around the two percent mark. We’re not quite there yet, so we’re not going to get that base rate cut this month.
Governor Andrew Bailey has admitted that the UK is “on track” to suppress inflation, but seems determined to remain behind the curve on this, as he has with everything else.
So forget a rate cut this month. The Bank should give us one, but it won’t. The pain of today’s high borrowing cost will drag on for even longer.
Now for the good news.
Markets reckon there is a 93 percent chance that MPC members will finally wake up in June, smell something that resembles coffee, and realise it’s time to serve us a nice, reviving interest rate cut.
It would be crazy to do anything else, in my view. Consumer price inflation is expected to have fallen sharply when April’s figure is published on Tuesday, May 21.
Headline CPI is expected to drop below the two percent target to a mere 1.9 percent, says Jeremy Batstone-Carr, economic strategist at Raymond James.
That’s not a guess. It’s pretty much a mathematical certainty.
Energy regulator Ofgem cut the household energy cap from April 1, saving £238 a year for a typical household that uses gas and electricity and pays by direct debit.
The cap will fall from £1,928 to £1,690 a year, a drop of 12 percent.
In April last year, the cap was a staggering £3,280. So it’s almost halved in a year.
You don’t need me to tell you that’s a huge drop.
Surely, surely, surely even the Bank can’t ignore that. Doubtless several MPC members will still be fretting over inflationary pressures, but I think public clamour for a rate cut will be too hard to resist.
Only one thing will stop them.
The Bank is structurally averse to sticking its neck out. It would much rather play safe and follow whatever the US Federal Reserve has decided.
Yet the US isn’t ready to cut interest rates, as its economy is still booming thanks to President Joe Biden‘s trillion-dollar stimulus programme.
The MPC will worry that if the UK does cut interest rates first it will weaken the pound, driving up the cost of imports and reviving inflation.
The last thing it wants to do is cut rates only to hike them again. That will make it look even sillier than it already does.
Yet I don’t think it will hold back in June, and nor do markets.
That will give everybody a real lift, especially struggling mortgage borrowers. Barclays has already started cutting mortgage rates in anticipation.
Falling interest rates will be bad news for savers, though. As I’ve repeatedly stated, they should consider locking into a best buy savings account now. Interest rate cuts are coming and we may even get a second one in September.
Sadly, they’re not coming as fast as they should.
