Bank of England Signals End of Interest Rate Cuts Amid Inflation Concerns

The Bank of England has indicated that significant cuts to interest rates are unlikely as officials assess the current monetary policy cycle. During a recent hearing before the Treasury Select Committee, members of the Monetary Policy Committee (MPC) acknowledged that the rate-cutting phase may be nearing its conclusion. External member Megan Greene noted that the Bank’s officials are divided on the possibility of identifying a neutral interest rate, although she anticipates fewer cuts moving forward.

Greene emphasized that the cycle of reductions cannot continue indefinitely, suggesting that the Bank is getting “closer” to its last cuts. Deputy Governor Clare Lombardelli added in a written statement that the neutral rate is likely to be towards the “upper end” of a range estimated between 2 percent and 4 percent. These insights raise questions about the future direction of interest rates, particularly amid rising inflation expectations among both businesses and consumers.

Inflation Pressures and Future Rate Decisions

Both Lombardelli and Greene raised concerns regarding price-setting behaviors, citing higher inflation expectations as a significant factor. Greene pointed out that the risks related to inflation are becoming more pronounced, particularly due to escalating food price inflation. Their comments have led to speculation about the voting behavior of hawkish members of the MPC in upcoming meetings, especially since both Lombardelli and Greene dissented during the historic interest rate cut in August 2023.

Governor Andrew Bailey acknowledged the uncertainty surrounding the timing and pace of potential interest rate cuts. He expressed concerns regarding persistent inflation within the UK economy, while also highlighting ongoing “weakness in the labour market.” Fellow rate-setter Alan Taylor, who initially supported a larger 50 basis point cut in August before settling on 25 basis points, emphasized that easing wage growth is likely to contribute to slower price growth in the months ahead.

Global Context and Monetary Policy Challenges

The Governor also addressed the issue of rising borrowing costs for the government, a situation that is not confined to the UK. Bailey remarked on the broad trend of steepening yield curves observed across developed nations, attributing this phenomenon to global economic factors. He confirmed that he has yet to decide whether the Bank’s quantitative tightening (QT) program will be paused in the upcoming month, clarifying that the central bank is not responsible for the turmoil affecting bond markets.

When questioned by Labour MP Yuan Yang regarding a report from the Institute for Public Policy Research (IPPR) suggesting that the Bank’s QT program is costing the government billions annually, Bailey refuted the claims. He maintained that the ongoing challenges in the bond markets are tied to wider economic conditions rather than the Bank’s actions.

In a broader context, Bailey defended the autonomy of central banks, particularly in light of recent criticisms directed at the Federal Reserve. He expressed concern over attempts to compromise monetary and financial stability for political gain, stating, “The job of an independent central bank is to provide those foundations, to take independent decisions to do it.” His remarks underscored the importance of maintaining institutional independence in the face of external pressures.

As the Bank of England navigates these complex challenges, the future of interest rates remains uncertain, with both domestic and global economic factors at play.