Interest rates: Andrew Bailey drops huge hint at when BoE could drop from 5.25%

The Bank of England will not wait for the US Federal Reserve to move on interest rates before it decides to cut rates in the UK.

Andrew Bailey, governor of the Bank of England, said: "There is no law that the Fed has to go first. Moreover, we have a remit and a target that is related to domestic inflation in the UK."

He added that the Bank will always "take the rest of the world into consideration", but only in regard to how it affects domestic inflation.

"But there's no law which says we can only move after the Fed moves. That is not something that ever gets discussed in the MPC."

Mr Bailey was speaking after the Bank's May Monetary Policy Committee meeting, when the MPC kept rates unchanged at 5.25 percent.

Andrew Bailey has indicated that the financial markets are more pessimistic about the path for lowering interest rates than the Bank of England.

"With the progress we've made, to make sure inflation stays around the target, it is likely that we'll need to cut bank rates in the coming quarters, possibly more so than is currently priced into markets," he said.

The Bank governor said the committee has "no preconceptions" about how far and how fast it can lower interest rates, and it make a judgment based on the economic data it sees before each meeting.

Andrew Bailey, governor of the Bank, said that upcoming economic data would be key to helping the MPC decide whether to cut rates on June 20.

He said: "Before our next meeting in June, we will have two full sets of data - for inflation, activity and the labour market - that will help us in making that judgement afresh.

"But, let me be clear, a change in bank rate in June is neither ruled out nor a fait accompli."

Bank of England Governor Andrew Bailey said there has been "encouraging news" on inflation, which the Bank expects to come close to its two percent target between April and June.

But he added: "We need to see more evidence that inflation will stay low before we can cut interest rates."

The pound fell against the US dollar and euro after the Bank of England signalled growing support for an interest rate cut among policymakers.

Sterling fell 0.3 percent to 1.246 US dollars and was 0.2 percent lower at 1.161 euros.

Lily Megson, Policy Director at My Pension Expert, said: “While high interest rates are often touted as good news for savers, the harsh reality is that an unchanged base rate feels like Groundhog Day for Britons.

“Indeed, the hold comes hand-in-hand with the ongoing burden of sticky inflation and the weighty cost of borrowing. For some savvy savers, there is a silver lining to continued higher rates – namely, strong returns on fixed-term products like annuities. Yet in truth, inflation has not fallen quickly enough, with millions struggling to save for long-term goals such as retirement.

“People should not be left to weather this storm alone, as the government has a critical role to play in ensuring access to independent financial advice and guidance for all. And with a general election fast approaching, it’s in their own interest to take action sooner rather than later.”

Andy Mielczarek, CEO of Chetwood Financial, said: “Any call to race ahead of the fed and cut the base rate early would have been short-sighted.

"Holding at 5.25 percent was the right decision by the Bank of England, as there remains enough uncertainty and stickiness around inflation to merit caution for a while longer."

Mr Mielczarek continued: "The reality is that despite recent decreases in inflation, we have yet to hit the Bank’s 2% target. We are seeing signs that the economic landscape is warming, so we must ensure that we have the stability and resilience necessary for future growth.

“A high-interest environment means difficulties for those with variable mortgage payments contributing to an already-high cost of living, but these are necessary evils for the UK’s economic recovery.

"As long as the base rate stays high, savers need to shop around to maximise the returns they are getting from the savings market and get their financial goals back on track.”

Inflation is expected to fall more than previously thought over the coming years, the Bank of England has projected, dropping below its two percent target to 1.5 percent in 2026.

Headline Consumer Price Index (CPI) inflation is expected to fall below the Bank's two percent target between April and June, but rise again to 2.6 percent in the second half of this year as the impact of recent drops in energy prices fades.

In the longer term, the Bank dropped its projections for CPI inflation to 2.25 percent for 2025 and 1.5 percent in 2026, down 0.25 and 0.5 percentage points respectively on February estimates.

The projection came in the Bank's May Monetary Policy Committee (MPC) report, which signalled optimism from recent falls in retail inflation.

The report said persistently high interest rates had helped push headline inflation down, as the MPC voted again to maintain rates at 5.25 percent.

Bank of England Governor Andrew Bailey said: "We've had encouraging news on inflation and we think it will fall close to our two percent target in the next couple of months.

"We need to see more evidence that inflation will stay low before we can cut interest rates. I'm optimistic that things are moving in the right direction."

The MPC indicated it is still looking for more progress on factors including services inflation and wage growth, which have remained persistently high at about six percent, before cutting rates.

In a statement Thursday, the bank’s nine-member Monetary Policy Committee voted 7-2 to keep rates unchanged, with the two dissenters backing a quarter-point reduction. Last time, only one member voted for a quarter-point cut.

The increase in the number of those backing a rate reduction is a clear indication that cuts are on the cards.

Like the U.S. Federal Reserve last week, which also kept rates, on hold, the majority on the panel wanted to see more evidence that inflation is under control.

The Bank of England, like the U.S. Fed and other central banks around the world, raised interest rates aggressively in late 2021 from near zero to counter price rises first stoked by supply chain issues during the coronavirus pandemic and then by Russia’s invasion of Ukraine.

The Bank of England has "set the stage" for June rate cuts, says Jeremy Batstone-Carr, European strategist at Raymond James Investment Services.

He said: “The Bank of England has voted to hold the base rate at 5.25 percent for the sixth consecutive time, setting expectations that the long-awaited rate cut will come on June 20. Since the Monetary Policy Committee’s (MPC) last meeting, headline and core inflation have dipped, with the descending trend expected to continue.

“Ahead of June 20, April’s CPI data on May 22 is expected to show that price increases have fallen sharply, laying the ground for rate cuts the following month.

"Although the labour market has shown signs of loosening, providing additional encouragement to the MPC, the possible inflationary consequences of a rate cut remain concerning to some of the rate-setters. The Committee thus remains divided on the road ahead, with some finding that the pace of deflation is still too slow for comfort.”

The Bank of England's Monetary Policy Committee has decided to hold interest rates at a 16-year high of 5.25 percent for the sixth consecutive time.

The markets are reportedly "static" ahead of the Bank of England's decision, which will be announced at 12pm.

“It’s common to see markets freeze ahead of an interest rate decision and that’s exactly what’s happened in the UK,” says Russ Mould, investment director at AJ Bell.

“While the Bank of England isn’t expected to cut or raise rates, investors are waiting nervously for the accompanying commentary and vote split as that could provide clues as to what could happen next. With such a big event on the horizon, it’s only natural that investors sit on their hands until they get the information."

At present, markets are expecting the ECB to cut first, potentially in June, with the Bank of England either following close behind in the same month or in August.

Mr Mould continued: "Even when we get the first cut, there is no guarantee that will trigger a massive rally in the equity market. By then, the market will have found something new to fret about, most likely when we’ll get the second, third or fourth cut and common sense suggests that investors simply need to be patient.

“Sadly, the market doesn’t work like that – it’s all about anticipating what might happen next, so investors will continue to be locked into their guessing game and that means ongoing volatility.

“The FTSE 100 was flat at 8,352 while other key markets in Europe were also fairly muted. HSBC trading without the right to its special dividend acted as a drag on the UK market and offset gains from other banking stocks.

“Among the mid-caps, energy and healthcare took the top slots while basic materials went into reverse."

The number of homeowner-mortgaged properties being repossessed jumped by more than a third in the first quarter of this year compared with the previous three months, according to figures from a trade association.

Some 870 homeowner-mortgaged properties were repossessed in the first quarter of 2024, 36 percent higher than in the previous quarter and nine percent higher than the same period a year earlier.

However, UK Finance, which released the figures, said that home repossession numbers remain very low compared with longer-term norms.

It said that, while the percentage of mortgaged properties being repossessed has increased, this is largely due to older arrears cases working their way through the court system. Proceedings were previously paused during the coronavirus pandemic.

Some 600 buy-to-let mortgaged properties were repossessed in the first quarter of 2024, marking a rise of a fifth (20 percent) compared with the previous quarter and 40 percent higher than the same period a year earlier.

Charles Roe, director of mortgages at UK Finance, said: "The number of mortgages in arrears, while still low, continues to rise as households remain under pressure from the cost of living and higher interest rates.

"Lenders offer a range of support to anyone worried about their finances, with teams of trained experts ready to help. If you are struggling, please reach out to your lender as soon as possible to discuss the support options available."

UK Finance said that mortgages in arrears accounted for 1.11 percent of all homeowner mortgages outstanding, and 0.69 percent of all buy-to-let mortgages outstanding in the first quarter of 2024.

The average two-year fixed savings rate has fallen from 6.29 percent to 5.91 percent since November 2023.

The average five-year fixed rate has also recorded a drop during the same time span, falling from 5.86 percent to 5.48 percent.

However, these average rates marginally increased from 5.8 percent and 5.39 percent respectively since last month.

Rachel Springall, a finance expert at Moneyfactscompare.co.uk, said: “Savers will find variable rates have remained rather robust over the past six months, but there have been cuts made to easy access accounts. They remain a firm favourite with savers, and there is hope that the market will stay resilient over the next few weeks, as expectations of an imminent base rate cut have waned.

"Challenger banks and building societies continue to offer the top easy access rates, so savers would be wise to review their account and switch if their loyalty is not being rewarded.

"One area of the market to thrive over recent months has been Cash ISAs; easy access returns have fallen recently, but unlike accounts outside of an ISA wrapper, they are higher than they were six months ago. A positive ISA season has been the key to improving accounts for savers this year, ideal for those looking to protect their cash from tax."

Ms Springall added: “Consumers worried that interest rates are due to come down this year may want to grab a deal quickly and review their existing pots.

"Variable savings rates can change at any time and, as we have seen in the past, a base rate cut can have a detrimental impact on the savings market."

Anthony Codling, managing director at RBC Capital Markets said the "tone" and mood" of today's MPC meeting will influence the trajectory of mortgage rates at large.

He said: "There is a hint in the latest RICS survey that the tide in the housing market is turning, with sellers getting more confident whilst buyers are starting to wince and sell the pinch of rising mortgage rates, raising the prospect that as we move from spring to summer, we are also moving from a seller’s to a buyer's season.

"However, one swallow does not make a summer, and we expect the tone and mood of today's MPC commentary to influence the trajectory of mortgage rates and the housing market at large."

Faisal Islam, economics editor at the BBC said the Bank of England should provide “some clues” regarding the trajectory of interest rates or the timing of potential future cuts.

Posting on X, Mr Islam said: "It’s interest rate decision day….

"And also a new economic forecast from the Bank of England…further hold expected, but some clues as to path/timing and splits in the committee as elsewhere (eg the US) cuts are pushed back… or (eg Sweden) they have already started…."

New home buyer inquiries fell back in April following three months of increases in a row, according to surveyors.

The Royal Institution of Chartered Surveyors (Rics) said its latest survey of property professionals suggests that a recent recovery in buyer demand has mellowed slightly, with the market seeming to have been impacted by mortgage rates edging up over the past few weeks.

A net balance of one percent of property professionals reported new buyer inquiries falling rather than rising in April, following a balance of six percent reporting inquiries rising in March.

Sarah Coles, head of personal finance, Hargreaves Lansdown, commented: “The optimism that permeated the property market earlier this year has been crushed by the relentless rise in mortgage rates.

"This has all the makings of a buyers’ market – except for the fact there are so few buyers.

"The first three months of the year saw cautious buyers emerge from the woodwork. Falling mortgage rates in January persuaded them to dip their toe into the pool of properties.

"It also saw sellers flock back to the market, and for-sale signs sprang up across the country."

However, she noted: "As mortgage rates have risen steadily since, it has squeezed buyers out again, leaving these properties unviewed and unloved."

Economics expert, Professor Andrew Angus at Cranfield School of Management said: “Despite the widely expected news later this week that the UK has emerged from last year’s shallow recession, there is still a job to be done to secure economic growth in the short-term.

"That’s why the Bank of England will continue to play it safe today, holding interest rates for the ninth consecutive month.

“The Bank’s Monetary Policy Committee will need to be convinced inflation is well and truly under control before we see a cut and I can’t see that happening until the summer. Using interest rates to manage inflation may be a blunt tool – but it’s the only one the Bank has at its disposal.”

Susannah Streeter, head of money and markets, Hargreaves Lansdown said: ‘’The FTSE 100 hasn’t been knocked off its course with positive winds still largely blowing around the index. Although there will be a certain amount of treading water ahead of the interest rate decision from the Bank of England, upbeat trade data from China is keeping optimism flowing.”

Exports grew by more than expected in April, increasing by 1.5 percent as customers in key markets around the world demonstrated more appetite for Chinese made goods.

Ms Streeter continued: “This has not only sparked fresh hopes of a steadier recovery for China’s economy, but also may be seen as a measure of more confidence in other economies where interest rate cuts are eyed on the horizon.”

Although the Bank of England is set to keep rates on hold yet again later, Ms Streeter noted: “Hopes are high that a summer interest rate cut will be on the agenda.

“Even though the Bank is set to stay in a holding pattern for now, there will be huge interest in the voting split between policymakers and the accompanying quarterly monetary policy report.

“Expectations are centring around an interest rate cut in August but if more than one policymaker votes for a rate cut, it will spark greater hopes that a cut could come earlier in June.”

New research from Moneyfactscompare shows the average rate on a 10-year fixed mortgage has risen from 5.75 percent to 5.97 percent since November 2023.

The rate increased from 5.77 percent since the start of April 2024.

The average standard variable rate (SVR) stands at 8.18 percent, down from 8.19 percent in November 2023. The rate has not changed since the start of April 2024.

Commenting on the data, Rachel Springall, finance expert at Moneyfactscompare.co.uk, said: “Borrowers may be disappointed to see fixed mortgage rates are on the rise. As has been the case since October 2022, the average five-year fixed mortgage rate remains below its two-year counterpart, which edges ever closer to six percent, not seen since December 2023.

Lenders have been busy reviewing their fixed rate pricing in response to volatile swap rates, seeing month-on-month rises.”

However, she noted: “Fixed rates are lower than they were six months ago, so consumers who are now coming off a two- or five-year fixed mortgage would be wise to act quickly to grab a competitive deal, particularly as some lenders have withdrawn deals priced below five percent.

“The mortgage market continues to be fluid despite no change to the Bank of England base rate since August 2023, and market forecasts have pushed back imminent cuts, due to stubborn inflation.”

Newly revived hopes for coming cuts to interest rates by the Federal Reserve have helped the US stock market to recover from its rough April.

Treasury yields have largely been easing since Federal Reserve Chair Jerome Powell said last week that the central bank remains closer to cutting its main interest rate than hiking it, despite a string of stubbornly high readings on inflation this year.

A cooler-than-expected jobs report on Friday, meanwhile, suggested the US economy could pull off the balancing act of staying solid enough to avoid a bad recession without being so strong that it keeps inflation too high.

The Times runs a “shadow monetary policy” committee, which is made up of nine senior economists (including some former members of the MPC).

It ‘voted’ to leave interest rates on hold today, but two of its nine members think the Bank should be cut. One voted for a rise.

Andrew Sentance, business economist and former MPC member who is part of the committee said inflation concerns are still causing most members to hold off from voting for a cut this month.

He said in an article published by The Times: "I am very firmly of the view that the MPC should hold rates at its meeting this week. “Core inflation” is still more than double the target rate; services inflation is six percent — three times the target rate — and shows little sign of subsiding quickly. Big hikes in phone and broadband charges will give impetus to services inflation; wages are rising at six percent a year, again, three times the two percent target rate.

"In these circumstances, it would be irresponsible for the MPC to cut rates when inflation is still over one percentage point above target."

The pound at 8am was 1.2479 dollars compared to 1.2500 dollars at the previous close.

Meanwhile, the euro at 8am increased slightly to 0.8605 pounds compared to 0.8603 pounds at the previous close.

Sweden's central bank, Riksbank, cut rates by 0.25 percentage points to 3.75 percent yesterday.

In a statement, it wrote: "If the outlook for inflation stays the same, the policy rate can be cut two more times during the second half of the year.

At the last meeting in March, just one member of the MPC, Swati Dhingra, voted for rates to be cut by 0.25 percentage points, but the remaining eight members voted for no change.

Philip Shaw, chief economist at Investec, said: "This broad direction illustrates that collectively the committee is moving gradually towards a rate cut.

"It seems unlikely though to be ready to bite the bullet just yet and the Bank rate looks set to remain on hold at 5.25 percent for the sixth consecutive meeting."

He added that it is possible that a second member of the MPC will switch to the "easing camp" and vote for a cut on Thursday.

Althea Spinozzi, head of fixed income strategy at Saxo, said the Bank of England is “unlikely” to announce further cuts soon amid an uncertain landscape as current UK monetary policy decisions are heavily reliant on upcoming data.

Ms Spinozzi highlighted how there are challenges to early and aggressive rate cuts while core and service inflation remains elevated 4.2 percent and six percent respectively and wages are still growing by six percent year on year.

Althea Spinozzi, head of fixed income strategy at investment bank Saxo, said: "Financial markets are bracing for UK inflation to reach two percent in the second quarter, following comments from Bank of England Governor Andrew Bailey indicating a significant anticipated decline in April's inflation figures.

“Bailey attributed this expected drop to the UK's distinctive approach to household energy pricing. Yet, wages and services inflation remain at six percent.”

While the Bank is exploring opportunities to begin reducing interest rates, Ms Spinozzi said: “This week’s Monetary Policy Committee (MPC) meeting will likely show that the rate cut cycle ahead remains uncertain. The data Bailey referenced will not be released until May 22, making it risky to pledge to an aggressive rate-cut cycle ahead.

“Therefore, even if the Bank of England pre-commits to a rate cut this summer, it is unlikely to announce further cuts soon, especially given the uncertain monetary policy trajectories of the European Central Bank and the Federal Reserve. This leaves UK monetary policy decisions heavily reliant on upcoming economic data.

“At the last MPC meeting, the BOE members decided by an 8-1 majority to maintain interest rates unchanged. In this meeting, it wouldn’t be surprising if the vote split adjusts to 7-2.”

Nicholas Mendes​​​​, mortgage technical manager at John Charcol said: “Since the beginning of the year, the Bank of England has taken a more conservative stance than the markets initially anticipated.

“Originally, projections suggested a total of 150 basis points in rate cuts throughout the year. However, expectations have been significantly adjusted, with predictions now set for a cumulative reduction of only 50 basis points by December.”

Mr Mendes said the likelihood of a rate cut in June “remains high”, but this could be followed by an additional cut in either September or November.

Nevertheless, he added: “If inflation and wage growth continue to exceed forecasts, the timing of these adjustments could be pushed back, potentially delaying the first rate cut until August.”

Alastair Douglas, CEO of financial institution TotallyMoney said pressure is mounting on the Bank of England from homeowners, as high interest rates are putting thousands at risk of falling into arrears.

Mr Douglas said: “Every day, more than 4,000 homeowners face a fresh financial shock when their existing cheap mortgage offer comes to an end.

“The options are then; lock in a new deal, paying almost double the interest rate, and potentially incurring product fees of around £1,000 — or move onto the SVR, which can be as high as 9.49 percent, and then hope the Bank of England starts slashing rates soon.”

Whatever the case, both choices will be considerably more expensive.

Mr Douglas continued: “The average homeowner is having to shell out an extra £2,040 each year on the average two-year fix, or £4,764 on the average SVR.

“And with people’s finances worn thin by the cost of living crisis, and inflation far lower than its 11 percent peak, pressure is now piling on the Bank of England to make their move. We can only hope they’ve fixed their forecasting, so as to stop inflicting even more misery on mortgagors.

“It’s estimated that 128,800 homeowners will fall into arrears by the end of the year, and if you’re struggling to keep up with your mortgage payments, then contact your lender as soon as possible.

“The regulator has told them they must act in your best interest, offering flexibility so you can better manage your borrowing. It won’t impact your credit score, but missing payments might. So don’t delay.”

Laith Khalaf, head of investment analysis at AJ Bell said: “There’s a great deal of speculation as to which of the big three western central banks is going to blink first and cut interest rates.

“The US Fed has pretty much ruled itself out of the race as policymakers have turned up the volume on their hawkish rhetoric. The Bank of England was first into the rate-hiking cycle, but it looks like it’s going to be pipped to the post on the way out by the ECB.

“Markets are expecting a rate cut from the ECB on June 6, with the UK central bank following suit either in June or August.”

Mr Khalaf added that there is some “safety in numbers” for central banks, because of the exchange rate effects of pulling away from the herd.

He said: “Cutting rates too far ahead of others can lead to currency weakness and additional inflationary pressure as a result.

“Leaving it too late can do unnecessary financial damage to the domestic economy. So far this year hopes for UK interest rate cuts have been pared back, leading to higher borrowing costs across the economy, and a tightening of financial conditions without the central bank actually having to lift a finger.”

The slowdown in money supply could cause deflation and recession unless the Bank of England changes course, analysts at the Institute of Economic Affairs (IEA) Shadow Policy Committee have said.

The SMPC believes that having successfully curbed inflation, the Bank risks doing “serious economic damage” by keeping rates too high for too long following a slowdown in the money supply.

The committee also expressed concern that the Bank of England has not adequately responded to inflation rates, which are considerably below the Bank's expectations and set to fall below the Bank’s two percent target imminently.

To boost money supply growth to a stable four to five percent level, members also urged an immediate end to Quantitative Tightening – the process of selling bonds to shrink the money supply and push up long-term interest rates.

The consensus is that the Bank of England needs to shift its monetary policy stance without delay to support the economy and prevent a damaging undershoot of the inflation target.

Dr Andrew Lilico, chair of the Shadow Monetary Policy Committee and executive director of Europe Economics, said: “The Bank of England was too slow raising rates when inflation was rising because it missed the clear message from rapid growth in the money supply data.

“It has made a similar mistake in recent months but in the opposite direction: money supply has contracted or grown only far too slowly for many months, yet the Bank has failed to cut rates.

“The consequence so far has been that inflation is well below what the Bank predicted. The consequence in the future will be inflation significantly under-shooting the target and economic growth being damaged. Rates should be cut immediately.”

The markets widely anticipate the first Base Rate cut to be announced in the summer. Some estimate June, while others lean closer to August.

Laith Khalaf, head of investment analysis at AJ Bell said: “It’s almost certainly too early for the Bank of England to pull the trigger on a rate cut right now, especially against the backdrop of a more hawkish US central bank.

“However, two important things occur before the UK interest rate decision on 20th June. One is the European Central Bank (ECB) policy decision in early June, where it is widely expected to cut rates, which would roll the pitch for similar action from the Bank of England.

“The other is more inflation readings for April and May, where CPI could get very close to, or possibly even hit, the Bank’s two percent target. The closer the inflation dial gets to two percent, the greater the pressure on the Bank of England to take their foot off the brake and cut rates.

“Markets currently think it’s a coin toss whether we get a UK rate cut in June, but this rises to a three in four chance priced in by August.”

Meanwhile, Steve Matthews, investment director, liquidity at Canada Life Asset Management said: “We maintain our view that a first cut of 25bps in August is still the most likely scenario.”

The Bank of England is expected to hold the base rate at the 16-year high of 5.25 percent.

Analysts speculate that with inflation still running higher than the Government-set traget of two percent, reducing rates today would be “too soon”.

Steve Matthews, investment director, liquidity at Canada Life Asset Management, said: “Looking ahead to Thursday’s Bank of England interest rate decision, we expect an 8-1 vote in favour of no cut, with Swati Dhingra being the lone outlier.

“While there’s optimism within the Monetary Policy Committee that inflation will close in on the all-important two percent as the fuel effect falls out, the Bank of England will be deeply aware of the second-round inflation effect.

“Rather than patting itself on the back when the two percent figure is hit, it will require clear evidence that inflation is under control rather than simply hitting a target.”

Good morning.

I'm Katie Elliott and I'll be bringing you updates on all things interest rates.

Please get in touch if you have any tips or stories to share.

My email is katie.elliott@reachplc.com