BoE holds rate at 16-year high, signals looming cut

LONDON, May 09 (AFP): The Bank of England (BoE) on Thursday kept its main interest rate at a 16-year high, but hinted at a cut over the summer as UK inflation cools further and the country looks set to exit recession.

"We need to see more evidence that inflation will stay low before we can cut interest rates," BoE governor Andrew Bailey said after the central bank left borrowing costs at 5.25 per cent, the highest level since 2008.

Signalling that a rate cut was on the horizon, two members of the bank's nine-strong Monetary Policy Committee (MPC) voted at the May meeting for interest rates to be cut by 0.25 per centage points.

The BoE maintained borrowing costs for a sixth meeting in a row, mirroring a wait-and-see approach by the US Federal Reserve and European Central Bank (ECB).

Thursday's decision came on the eve of official data expected to show that the UK economy has exited a mild recession ahead of a general election due this year.

The BoE on Thursday voiced confidence that the UK economy had grown in the first quarter, which would signal the end of a short-lived recession. "The bank is still on track for summer easing," Yael Selfin, chief economist at KPMG UK, said following the rate decision.

"The MPC confirmed its more dovish stance by emphasising confidence about inflationary pressure easing broadly as expected, although the 7-2 vote split suggests uncertainty around inflation persistence," she added.

UK annual inflation fell less than expected in March-the last official reading-to 3.2 per cent.

This is well down compared with late 2022, when the rate reached a four-decade high above 11 per cent as energy and food prices soared following Russia's invasion of Ukraine.

However, the UK inflation rate remains above the Bank of England's two-per cent target, prolonging a cost-of-living crisis. "We've had encouraging news on inflation and we think it will fall close to our two-per cent target in the next couple of months," Bailey said Thursday.

"I'm optimistic that things are moving in the right direction."

The pound dropped against the dollar and euro following Thursday's decision, and with a rate cut in sight.

By contrast, London's benchmark FTSE 100 index hit a fresh record high, as did Frankfurt, with markets forecasting rate reductions in the coming months also from the ECB and the Fed.

Despite the upbeat sentiment, a leading international organisation last week said that the UK would expand by only 0.4 per cent this year because of the inflation situation and stubbornly-high interest rates.

The Organisation for Economic Cooperation and Development (OECD) projected also that the UK would perform worst among the Group of Seven major economies next year.