The Bank of England’s rate-setting body is likely to keep interest rates on hold at 5.25% for the sixth time in a row when it meets on Thursday, as stronger wage and inflation data has pushed back the chances of a summer rate cut.
Deutsche Bank expects a 7-2 vote for holding the rate at a 16-year high, with deputy governor Dave Ramsden joining external member Swati Dhingra in favour of easing the base rate.
The German bank forecasts the nine-strong Monetary Policy Committee will make its first 0.25% cut in June, as does HSBC, followed by two similar cuts in September and December.
However, the consensus view in the money markets is that September will be when the Bank makes its first rate cut.
Hargreaves Lansdown head of money and markets Susannah Streeter says: “Policymakers are keeping a sharp eye trained on the rate of wage growth, which is still running at 6%, including bonuses.
“The concern is that companies may pass on those higher costs to customers. In the services sector, inflation was still at 6% in March, with prices particularly hot in bars and restaurants.
“Although the economy is showing all the signs that last year’s mild recession is nothing more than a vapour trail, growth isn’t expected to accelerate significantly until borrowing costs begin to fall.”
Hargreaves Lansdown head of personal finance Sarah Coles points out that the mortgage industry is already working on the assumption that there will not be base rate cuts until “August or September, although a June cut is still a remote possibility”.
Coles adds: “The mortgage market has already priced in these expectations, which is why we’ve seen widespread rate hikes recently. As a result, if the Bank holds rates and issues a statement saying it’s in no rush to cut them, we may get very little reaction.
“It’s only if we get hints at potential earlier cuts that we could see some better deals emerge.
She says: “In fact, if the cuts come in the autumn, we may not get dramatic changes to mortgage rates even then.
“Variable rates will fall, but with only two or three cuts expected by the end of the year, they’re unlikely to move far.
“Fixed rates, meanwhile, may remain unmoved until we have signs that inflation has worked its way out of the system and rates are set to go significantly lower in the foreseeable future.”
However, analysts will closely watch the MPC’s latest inflation forecasts for a sign of when rate cuts may come.
EY UK chief economist Peter Arnold says: “If the MPC’s new forecast shows inflation below 2% at the two-year horizon then this would be a signal that market pricing is too high and the MPC expects to cut Bank rate more substantially than consensus expectations.”
UK annual price growth is currently 3.2%, above the central bank’s 2% target.
Annual earnings growth slowed to 6% from 6.1%, according to the National Office for Statistics last month, but this was still stronger than the 5.8% pace analysts had expected.
Several members of the MPC have raised concerns that wages at this level may add to persistent inflationary pressure.
Last month, the Bank’s chief economist and MPC member Huw Pill warned that there are “greater risks” from cutting the base rate too early rather than too late.
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