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Bank of England Holds Rates Steady

BOE’s Monetary Policy Committee Voted 7–2 to Keep Rates on Hold

The Bank of England decided to keep its key interest rate unchanged at 5.25%, but hinted at potential rate cuts in the coming months, possibly as early as June. The BOE expects inflation to reach its 2% target in the April data due to falling prices for energy. However, the central bank needs to be vigilent due to still strong wages and services price pressure. For example, services price inflation is at 6% which is higher than both the US and Europe. However, economic growth in the UK is slower.

The hope is that higher borrowing costs will put a break on inflation. If the data on wages shows signs of slowing inflation we expect the first rate cut to happen in the next meeting in June. Otherwise, expect the first cut by August. In fact, other central banks in Europe, such as Switzerland and Sweden, have already lowered key interest rates in response to economic conditions.

Investors are shifting their bets as the Bank of England’s interest rate cut seems imminent while the Federal Reserve is expected to hold rates. The pound has been falling due to weak economic data and decreasing inflation in the UK. Traders are expecting the BoE to deliver rate cuts, while the Fed might not need to ease rates due to strong US economic data. Hedge funds and asset managers are increasing their short positions on the sterling.

The market now expects two rate cuts from the BOE compared to one rate cut for the FED. In addition, the BOE is expected to cut first. This means that currency markets are likely to remain volatile as investors navigate through diverging central bank policies and geopolitical developments.

This is considered good news for the housing market since expected rate cuts this summer would mean relief for many homeowners. The UK mortgage market has fixed rate mortgages that need to be reset after 3 or 5 years, thus consumers take on interest rate risk unlike the US where fixed rate mortgages can be for 15, 20 or 25 years.