All eyes will be on the hotly anticipated inflation data tomorrow that will reveal how close the rate of rising prices is near to the Bank of England’s official target.
Mortgage holders, house hunters, City experts, along with other borrowers and savers are waiting for indications on the timing of the first UK interest rate cut this year, with some analysts predicting that they could be reduced as soon as next month.
Ben Broadbent, the Bank’s deputy governor for monetary policy, said that if the economy evolves as expected, borrowing costs could possibly be lowered “some time over the summer” in response to a steep fall in inflation.
Broadbent said the monetary policy committee’s (MPC) nine members must assess how those “second-round effects” in domestic prices and wages change the course of inflation over the next two years.
The consultancy Capital Economics has forecast that inflation will fall below the central bank’s 2% target when figures for April are published tomorrow and drop to less than 1% before the end of the year.
“This underpins our forecast that the Bank will cut interest rates from 5.25% now to 3% next year, rather than to 3.75% as investors expect,” the consultancy said.
Other analysts expect inflation to bounce back above 3% before the end of the year as persistently high services inflation and wage increases in the financial and business services industry remain high, feeding into higher prices.
Broadbent said: “There is a range of views across the committee on this point. In view of the rarity of events like this over the past, and the associated uncertainty about the future, that’s entirely understandable.
“Whatever the priors of its individual members the MPC will continue to learn from the incoming data and, if things continue to evolve with its forecasts – forecasts that suggest policy will have to become less restrictive at some point – then it’s possible Bank rate could be cut sometime over the summer.”
Earlier this month the MPC voted 7-2 to leave interest rates unchanged at their current 16-year high of 5.25%, with Broadbent one of seven members who opted for no change.
The money markets currently indicate that there is a 57% chance that rates will be lowered to 5% at the Bank’s next meeting in June, while a cut by August is almost fully priced in.
