BoE holds interest rates at 16-year high of 5.25%... but governor Andrew Bailey says cuts could start next month and be more dramatic than markets expect - in boost for struggling mortgage payers

The Bank of England held interest rates at their 16-year high of 5.25 per cent today - but hinted that cuts are imminent.

The Monetary Policy Committee kept the base rate at a standstill despite positive signs that inflation is finally coming under control.

However, two of the nine members voted for a 0.25 percentage point reduction, fuelling hopes that the burden will be eased soon. 

Governor Andrew Bailey told a press conference that a cut next month was on the table, describing it as 'neither ruled out nor a fait accompli'.

And he suggested that the reductions could be more dramatic than markets expect.  

Minutes of the MPC meeting underlined that it does not believe the UK needs to wait for the US to begin trimming, after the Fed played down the chances of movement before the end of the year.

Mr Bailey said he was 'optimistic' about the unfolding situation. 'We've had encouraging news on inflation and we think it will fall close to our 2 per cent target in the next couple of months,' he said.

'We need to see more evidence that inflation will stay low before we can cut interest rates. I'm optimistic that things are moving in the right direction.'

Economic data will be critical in whether the Bank decides to pull the trigger next month, with GDP estimates due tomorrow and two sets of inflation numbers in the interim. 

Chancellor Jeremy Hunt welcomed the message from Mr Bailey, although he stressed the decision on rates is independent and he would rather the Bank is 'certain' before acting.  

'The Bank of England governor for the first time has expressed real optimism that we are on that path,' he said. 

The MPC indicated it is still looking for more progress on factors including services inflation and wage growth, which have remained persistently high at about 6 per cent, before cutting rates.

The minutes said: 'Internationally, recent growth outturns have tended to be stronger in the United States than in the euro area.

'Underlying inflationary pressures in both regions have continued to moderate somewhat since the start of the year, though by less than expected in the United States. Forward interest rates have risen in the United States and, as a result, elsewhere.'

Households have been suffering a brutal squeeze since interest rates started rising at the end of 2021 to deal with prices being pushed up by the global Covid recovery.

Having peaked at 11.1 per cent as the Ukraine war caused a spike in energy costs, headline CPI inflation was down to 3.2 per cent.

But that is still above the Bank's 2 per cent target, and economists believe the MPC will want to hold out until they are certain inflationary pressures have subsided.

Inflation is expected to fall more than previously thought over the coming years, the Bank of England has projected, dropping to 1.5 per cent in 2026.

CPI is expected to fall below the target between April and June, but rise again to 2.6 per cent in the second half of this year as the impact of recent drops in energy prices fades.

In the longer term, the Bank dropped its projections for CPI inflation to 2.25 per cent for 2025 and 1.5 per cent in 2026, down 0.25 and 0.5 percentage points respectively on February estimates.

Markets are anticipating the first cut from Threadneedle Street could come next month. 

ING Developed Markets Economist James Smith said: 'The Bank of England is getting very close to its first rate cut.'

Susannah Streeter, head of money and markets at Hargreaves Lansdown, said the report was the 'spring warm up act for the rate cut party set to kick off in the summer'. 

'Policymakers are showing signs of being more optimistic that unruly inflation looks more under control, and they appear a bit more prepared to bring an end to painfully high borrowing costs sooner rather than later,' she said.

'There's been a shift in opinion around the table, with another member of the MPC, Dave Ramsden, voting for a rate cut, joining Swati Dhingra who has been vocal about the need for lower borrowing costs for some time.

'The pound has fallen back against the dollar on the news, sparking a fresh run of enthusiasm among investors, helping the FTSE 100 climb sharply and extend its record run. 

'The Bank of England is now expected to move much more quickly than the Fed in cutting rates, given the changing sentiment at the Bank.'

Capital Economics said the Bank had 'given the impression it's getting closer to cutting rates'. 

'We think some soft inflation and wages data may be enough to prompt it to cut rates at the next meeting in June, if not at the following meeting in August,' a briefing said. 

The US Federal Reserve said last week it was keeping its key interest rate at the same level and noted a 'lack of further progress' towards lowering inflation.

It means rates could stay higher for longer until there is firmer evidence of price rises easing, the Fed's chairman Jerome Powell suggested.

However, Mr Bailey has insisted the conditions in the UK are different, suggesting that there is no need to stick to the same timetable.

At the last meeting in March, just one member of the MPC, Swati Dhingra, voted for rates to be cut by 0.25 percentage points, but the remaining eight members voted for no change. This time Dhingra was joined by Dave Ramsden.

Experts have also pointed out that two key economic indicators for the Bank of England – pay growth and services sector inflation – have remained more stubborn.

Average wages continued to increase faster than the rate of inflation last month.