Hope of Interest Rate Drop in Summer

Models of houses standing on top of piles of coins at various heights
Author: Samuel Beckingham
Updated: May 15, 2024
3 minutes read

Last week, the Bank of England held interest rates at 5.25%. They stated that there wasn’t yet sufficient evidence to suggest rates could be lowered. However, there’s a glimmer of hope for a reduction to come once summer rolls around.

2% Target

Acting to tame inflation and keep it in check, the Bank of England adopts two mechanisms. These are quantitative easing and adjusting the Bank Rate. The former involved buying bonds and printing more money (which depreciates its value), while the latter cuts disposable income for households.

Governor Andrew Bailey has stated the 2% target should be hit between April and June, which will be a relief for millions of mortgage holders up and down the country. However, that is no guarantee that the Bank Rate will fall in June.

The Monetary Policy Committee (MPC) looks at various factors before they make their decision. These include economic activity and the labour market. At every meeting, the MPC makes up their minds anew, which means fresh data could affect their decision. If it’s clear that inflation will stay down, a rate cut could be on the cards.

How Quickly Will Interest Rates Fall?

There’s no definitive answer to this, as the data is currently being gathered for the periods before the next MPC meeting. Some believe the financial markets are more pessimistic than the Bank of England is, which is why borrowing has recently gone back up again.

There’s a real chance that the next cut could significantly bring down the current ones priced into the market. It mainly depends how much evidence there is and the quality of the data. Two members of the MPC voted to lower interest rates by 0.25%, but they were outvoted. With stronger signs that inflation is under control, a higher percentage reduction might be possible.

Financial markets are forecasting rates to cut to 5% by August, then 4.75% at the end of the year. They’re currently predicting the majority of cuts to come in 2025.

Consumer Price Index

Over the next few years, CPI inflation is expected to fall to a lower level than previously anticipated. By 2026, it’s predicted to fall to 1.5%. However, while the 2% target will most likely be met between April and June, it could then rise to 2.6% by the end of 2024.

Economic Growth

While the UK fell into recession at the end of last year, it’s possible that this was short-lived. The Bank of England forecast economic growth of 0.4% for the first quarter of the year, and 0.2% for the second, which is a good indication that things have started to pick up.

MPC reports indicate GDP will increase 0.5% this year and then 1% in 2025. Compared to their previous assessment, this is 0.25% higher than what they were expecting in February.

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