Interest rates - latest: Bank of England criticised for ‘overly cautious’ rates decision

Just an hour before the Bank of England reveals its decision on interest rates, Norway’s central bank has decided to keep its at 4.50 per cent.

“The current forecast indicates that the policy rate will continue to lie at 4.5% in the period to autumn before gradually moving down,” the central bank said in a statement.

Analysts in the Reuters poll on average have forecast that Norges Bank will cut the cost of borrowing twice in the second half of 2024, to 4.0 per cent by year-end.

“In its assessment of the interest rate outlook, the committee was concerned with the possibility that if the policy rate is lowered prematurely, inflation could remain high, among other things, because the crown might then weaken,” Norges Bank said.

Analysts from BNP Paribas said on Wednesday it is unlikely rates will change today and they expect them to be kept at 5.25%.

“We do not think that this morning’s data [inflation] will move the needle for the BoE meeting tomorrow,” said Matthew Swannell, Dani Stoilova and Gerardo Martinez at BNP Paribas.

“One area of the focus will be the vote split, with the largest uncertainty around whether hawk Jonathan Haskel changes his vote from a 25bp (base point) vote hike to a hold.

“By his own admission, his February vote for a hike was ‘finely balanced’, so it is difficult to call how he will vote tomorrow.

“Our expectation is that despite the BoE’s core services inflation dropping in February - which it would seem Haskel attaches some weight to - he will need further evidence of its being on a downwards trajectory before adjusting his vote. We expect an unchanged vote split.”

Switzerland has bucked the recent trend for Western governments and decided to cut interest rates on Thursday.

It has lowered its base rate from 1.75 per cent to 1.50 per cent in a move that surprised financial markets.

Just half an hour to go before the BoE announces its interest rates decision...

James Burgess, Head of Commercial and insolvency expert at Atradius UK, said: “The tide has finally started to turn on the cost-of-living crisis, as inflation surpasses ONS forecasts to drop to its lowest level in two and a half years. This will be hugely promising news for homeowners and buyers reliant on fixed-rate mortgages, who have been the hardest hit by rising costs and will be hoping for interest rates to fall soon.

“We don’t expect the interest rate to fall until June, but we should start to see a positive impact on fixed mortgage rates, as these are set based on interest rate outlook rather than today’s rate. If the interest and inflation rates do decrease as expected, we should see average two-year fixed rate mortgages fall back below 5% by June.

“Construction businesses should feel the impact of this over the next few months, after a challenging 12 months where completion of new housing supply dropped due to supply chain challenges and reduced consumer demand. Firms are also navigating house price challenges, balancing profitability of building projects with unstable house prices and varying consumer demand. Consumer demand needs to stabilise if we are to overcome these challenges. A positive interest rates outlook today would be very welcome by businesses in the sector and bring a much-needed boost to the housing market.”

The UK’s cost of living crisis “is ending” and people have “cheered up”, a Tory MP has said.

Andrea Leadsom, Conservative MP for South Northamptonshire made her comments after inflation fell by 3.4 percent.

In an interview on the Sky Politics Hub on Wednesday (20 March), Ms Leadsom said: “What is really important is we have seen a fantastic drop in inflation today, that’s obviously cheered everyone up. It is what we have been working towards, is seeing the cost of living crisis end, and people take more home in their pay packets or in their salaries every day.”

The Bank of England has kept interest rates at the same level of 5.25 per cent, as widely predicted by financial markets.

Following the decision to hold rates at 5.25 per cent, BoE governor Andrew Bailey said: “In recent weeks we’ve seen further encouraging signs that inflation is coming down.

“We’ve held rates again today at 5.25% because we need to be sure that inflation will fall back to our 2% target and stay there.

“We’re not yet at the point where we can cut interest rates, but things are moving in the right direction.”

Professor Joe Nellis, MHA’s Economic Advisor and Professor of Global Economy, Cranfield School of Management, said: “Yesterday’s sharper than expected fall in headline inflation for February shows that the UK economy is beginning to show signs of recovery.

“While the MPC voted to keep rates unchanged this month, optimism around GDP coupled with the downward trend for inflation indicates that they could start to cut rates sooner than expected – perhaps as early as May.

“There are likely to be at least two additional cuts in interest rates this year after the initial cut in May or June. Interest rates are likely to normalise at around 3.5 to 4% by the beginning of 2025, but they will not be falling to the record lows enjoyed by borrowers in previous years.

“The Bank of England’s default position is to set interest rates at 2 to 3% above inflation to give them some leverage and control over inflationary pressures – they would prefer to be in a position of ‘pulling on a string’.”

Foxtons chief executive, Guy Gittins, commented: “Homebuyers have been waiting patiently for an interest rate reduction and while it is largely expected to come this year, it seems as though they will have to wait a little longer still.

“The positive to take is that an air of stability has returned to the UK property market since rates were held at 5.25% last September and this has helped revitalise buyer activity levels in recent months.”

Lomond CEO, Ed Phillips, said: “Having previously endured 14 consecutive base rate hikes since December 2021, it’s been a case of no news is good news for the nation’s homebuyers of late when it comes to the Bank of England’s decision on interest rates.

That said, they can be forgiven for feeling a little disappointed that we didn’t see a cut materialise today, particularly given this week’s inflation figures.

And Director of Benham and Reeves, Marc von Grundherr, added: “Continued certainty is no bad thing but homebuyers are crying out for some form of relief, particularly in London where the combination of high house prices and high mortgage rates are dampening purchasing power to the greatest extent.”

Marion Amiot, senior European economist at S&P Global Ratings on the decision: “The Bank Of England will need to see a lot more moderation in wages and services prices before it starts cutting rates. We don’t expect that to be before August as the labor market remains tight.

“While vacancies are falling, the workforce is barely expanding, supporting pay increases that are well above productivity gains and the 2% inflation target.”

Ruth Gregory, Deputy Chief UK Economist, at Capital Economics said: The Bank of England sprung no surprises, leaving interest rates at 5.25% for the fifth time in a row and, despite no MPC members no longer voting to raise interest rates, it retained its relatively hawkish guidance.

“But it is the data not the guidance that counts. And our forecast that inflation will fall further and faster than the Bank expects suggest it will change its tune in the coming months.

“That’s why we think a rate cut in June is possible and why we think rates will fall to 3.00% in 2025 rather than to 3.75-4.00% as priced into the market.”