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The Bank of England kept British interest rates unchanged at 5.25%, pushing the pound lower as the central bank signaled it is moving closer to cutting borrowing costs.
Governor Andrew Bailey said things were “moving in the right direction” on inflation after the BoE’s monetary policy committee kept the policy rate at its highest in 16 years for the fifth time in a row.
Two members who had previously called for higher interest rates dropped their calls, instead voting with the majority for unchanged rates.
Following Thursday’s announcement, the pound fell against the dollar, losing 0.4% to $1.273.
The FTSE 100 index rose 1.5%. Interest rate-sensitive two-year gilt yields remained stable at 4.14%.
This year, traders in the swap markets have moved to set prices with three cuts of 0.25 percentage points. The probability that rate cuts will begin by June is 73%, up slightly from 70% yesterday.
“In recent weeks we have seen further encouraging signs that inflation is coming down,” Bailey said. “We’re not at the point where we can cut interest rates yet, but things are moving in the right direction.”
The BoE’s growing optimism about inflation comes after the US Federal Reserve triggered a market rally overnight, with officials indicating they plan to cut interest rates by three-quarters of a percentage point this year.
The Swiss National Bank unexpectedly cut its key rate on Thursday, while the European Central Bank also suggested it would reduce borrowing costs by June.
The BoE noted an “improving outlook” for the UK economy, which fell into a technical recession in the second half of last year.
Pressure from Britain’s ruling Conservatives for cuts is likely to intensify ahead of a general election due this year.
Using new language signaling that meetings will henceforth actively discuss rate cuts, the BoE said the MPC “will continue to consider the degree of policy tightening at each meeting.”
The bank said on Thursday that official data showed inflation had fallen “relatively sharply” since the MPC last met in February.
In data released this week, overall consumer price inflation for February fell more than expected to 3.4%, the lowest rate since 2021.
The BoE now expects inflation to fall slightly below its 2% target in the second quarter of the year as wage growth slows. He said Thursday that even after the cut, rates will still be high enough to fight inflation.
But the bank warned that inflation remained “high” for services prices, which last month rose at an annual rate of 6.1%.
In a sign of continued internal divisions, the BoE noted that MPC members differed “on the extent of evidence” of easing price pressures that would be needed to cut rates.
At this week’s meeting, all but one of the nine MPC members voted to keep rates unchanged, with Jonathan Haskel and Catherine Mann abandoning their earlier calls for quarter-point increases. One member, Swati Dhingra, continued to vote for an immediate cut.
The last time no one voted for a rate increase on the MPC was in the fall of 2021.