Commenting on the Bank of England’s interest rate hold at 5.25%, Chris Arcari, Head of Capital Markets, Hymans Robertson, said:

“As expected the Bank of England left rates unchanged at a 23-year-high of 5.25% p.a. Headline CPI inflation has fallen sharply, to 3.4% year-on-year, from its 11.1% peak in October 2022. Indeed, it is expected to fall further and even dip below target in late spring and early summer, as the full impact of lower energy prices and lower food and goods price inflation is felt.

“However, there are reasons for the Bank of England to err on the side of caution with regards easing policy. Core inflation, which excludes volatile energy and food prices, is still more than double the bank’s target at 4.5% year-on-year.  And service-sector price and wage growth, both running at 6.1% year-on-year, are two closely watched measures of genuine domestic price pressures.These data points more than justify the BoE’s current wait-and-see approach.

“Nonetheless, recent and forecast declines in inflation are likely to open the door to rate cuts this year. Even though the BoE stopped raising rates in August last year, monetary policy has continued to tighten, as real interest rates have risen as inflation has declined, and so a moderately restrictive monetary policy stance can be maintained, even as interest rates are lowered. Additionally, central banks do not target realised inflation, but where they think inflation will be over the forecast horizon, which may be a reason for a central bank reducing rates even if core or headline inflation is still above target.

“Given weak real GDP growth and declining inflation, we see scope for two to three 0.25% p. rate cuts this year. However, we expect central banks, including the BoE, to err on the side of caution and look to slowly make rates less restrictive, rather than cutting rates to levels that would be considered stimulative. Given still strong underlying inflation pressures, we see the balance of risks pointing toward the central bank reducing rates less, rather than more, than the market expects."