The Bank of England kept interest rates unchanged on Thursday, but the decision came only after a surprisingly tight 5–4 vote. Policymakers said borrowing costs are likely to be lowered if an anticipated decline in inflation proves durable.
Despite sharply downgrading its economic growth outlook for the year and forecasting higher unemployment, the BoE left its benchmark rate at 3.75%, in line with expectations from a Reuters poll of economists.
Sterling slid by nearly one cent against the U.S. dollar and was on track for its biggest one-day drop since September, as investors brought forward expectations of a BoE rate cut. Two-year government bond yields fell around seven basis points, touching their lowest level since January 14 at 3.620%, before trimming some of those losses.
“Cooling demand, fading inflation risks and a softening labour market all support the case for easing. If not March, then April remains the most plausible window for the next cut,” said Stefan Koopman, senior macro strategist at Rabobank.
Markets were pricing in close to a 50% chance of a rate cut in March—up from about 25% before Thursday’s announcement—a view Governor Andrew Bailey said looked reasonable.
Bailey signals room for further rate cuts
Bailey, one of the five members of the Monetary Policy Committee who voted to keep rates on hold, struck an optimistic tone, saying inflation appears to be losing momentum faster than the BoE expected just three months ago.
“All going well, there should be scope for some further reduction in Bank Rate this year,” he said.
While stressing that no specific timing has been set for the next move, Bailey described market expectations for two quarter-point cuts this year as “reasonable.”
