Bank of England Signals End of Interest Rate Cuts Cycle

The Bank of England has indicated that it is unlikely to implement significant cuts to interest rates in the near future. During a recent hearing before the Treasury Select Committee, members of the Monetary Policy Committee (MPC) expressed that the current cycle of rate reductions cannot continue indefinitely. External member Megan Greene noted that the Bank was approaching its last cuts, suggesting that fewer reductions are expected.

Greene’s comments reflect a growing consensus among officials that market predictions of no further cuts this year may be accurate. She stated that there is disagreement among Bank officials regarding the identification of a neutral interest rate, but indicated that the range is likely closer to the upper end of 2% to 4%.

Concerns Over Inflation and Rate Decisions

Both Greene and Deputy Governor Clare Lombardelli raised concerns about the effects of rising inflation expectations on pricing behavior among businesses and consumers. Greene specifically highlighted the impact of increasing food prices, which have made risks to inflation more pronounced. These discussions have cast doubt on whether more hawkish members of the committee will support further rate cuts in upcoming meetings.

Governor Andrew Bailey acknowledged the uncertainty surrounding the timing and speed of potential interest rate reductions, attributing this to persistent inflationary pressures within the UK economy. He pointed out emerging weaknesses in the labor market and noted that easing wage growth could help moderate price increases in the coming months.

In a separate note, Alan Taylor, another member of the MPC, shared his insights following the August meeting, where he initially advocated for a larger 50 basis point cut before settling on a 25 basis point reduction.

Global Context of Rising Borrowing Costs

Bailey also emphasized that the increased borrowing costs faced by the government are not unique to the UK, citing turmoil in global bond markets. He stated, “You have seen a steepening of yield curves across the whole developed world.” The Governor attributed these developments to global economic factors rather than actions taken by the Bank.

As the central bank prepares to make decisions regarding its quantitative tightening (QT) programme, Bailey confirmed that the impact of QT on public finances will be a crucial consideration in the coming weeks. He has yet to decide whether the programme will be paused next month.

In response to suggestions made by Labour MP Yuan Yang, based on a report by the Institute for Public Policy Research (IPPR), Bailey pushed back against claims that the Bank’s policies were costing the government tens of billions of pounds annually.

In a related matter, Bailey defended the independence of the Federal Reserve amidst criticisms from President Donald Trump. He expressed concern over any attempts to compromise the autonomy of central banks, describing such actions as a “very dangerous road to go down.” He reaffirmed that the role of an independent central bank is to maintain monetary stability through independent decision-making.

These developments highlight the complexities facing the Bank of England as it navigates uncertain economic waters and balances the need for stable monetary policy with rising inflationary pressures. As officials assess their next steps, the focus remains on the broader implications for the UK economy and the financial landscape.