After a long period of high inflation, the Bank of England has finally kept its 2 percent inflation target firmly in its sights.
The central bank said on Thursday that inflation will reach its target in two years and then be even lower, a forecast that policymakers are moving towards cutting interest rates.
Most of the bank’s nine-person rate-setting committee voted this week to keep rates at 5.25 percent, the highest since the start of 2018 and where they have been for nine months. But two members voted to cut rates, compared to one at a previous meeting in March. The Bank’s governor, Andrew Bailey, said this week that while it was too early to cut interest rates, the slowdown in inflation was “encouraging”.
Mr. Bailey said at a news conference.
Policymakers are waiting for more data to determine whether they have “sufficient confidence” that inflation is on track before cutting rates.
By the bank’s next meeting in June, policymakers will receive more economic information, including two months of inflation and labor market reports.
“A change in the bank rate in June was neither ruled out nor a reasonable move,” Mr. Bailey said.
Investors have recently been betting that the Bank of England will cut interest rates in August and one more time before the end of the year. After Thursday’s announcement, expectations for a cut in June rose, with markets indicating a roughly 50 percent probability of a move.
In the next one-and-a-half years, the bank expects inflation to be around 2.5 percent. But inflation will ease to 1.9 percent in early 2026 and 1.6 percent in three years. Although inflation has retreated far from its recent peak, when it rose above 11 percent in late 2022, the central bank is wary of prematurely declaring victory.
Like many other central banks, the Bank of England is trying to find a delicate balance between cutting interest rates as inflation falls towards its target.
The United States has issued a possible warning. The Federal Reserve is expected to hold off on rate cuts as data show price pressures remain strong in the US. In March, consumer prices rose 3.5 percent from a year earlier, beating economists’ forecasts. But across Europe, confidence is growing that high inflation has dissipated and that rate cuts will support a weak economy. On Wednesday, Sweden’s central bank cut rates, and European Central Bank policymakers said they expected to follow suit next month.
Britain is in a tricky position somewhere in between. When the inflation measure for April is released in two weeks, price growth is expected to have slowed to the central bank’s 2 percent target due to the effect of lower household energy bills. It will be 3.2 percent in March. But the Bank of England is treading carefully.
Some aspects of inflation are still running relatively hot. Average annual wage growth and service inflation were both 6 percent. That’s still too high for some policymakers to feel confident that inflation will drop to 2 percent.
“We haven’t beaten inflation yet,” said Tera Allas, director of research and economics at McKinsey’s Britain and Ireland office and a former economist in the civil service. He said he expected inflation to fall further this year, but it would be “really volatile”.
“We’ll get into something like the US situation, where it’s no longer a clean line” of low inflation, Ms. Allas said. “It will be up and down, up and down, but I suspect it will be less than the US.”
All this against the backdrop of sluggish economic growth. The Bank of England forecasts that the British economy will expand by just 0.5 per cent this year and 1 per cent next year. This increase is mostly due to the growing population. At the same time, consumer spending is projected to support economic growth as average wages rise faster than inflation and employment levels remain relatively strong. But other factors weigh on the economy, such as restrained government spending and high interest rates that discourage investment and borrowing.
On Thursday, the National Institute of Economic and Social Research said the central bank would wait until August to begin cutting rates, then cut rates once again this year and twice next year, before gradually reducing the rate until it settles at 3.25. percent.
Paula Bejarano Carbo, an associate economist at the firm, said caution among central bankers is “justified,” noting that there are still risks of higher inflation due to price pressures in the services sector, for example.
