The pound and the cost of government borrowing jumped as hopes of further interest rate cuts this year began to fade following a hawkish turn from the Bank of England.
The central bank cut rates by 0.25 percentage points to 4 per cent yesterday, their lowest level in over two years.
The cut followed a dramatic meeting of the Bank’s nine-member Monetary Policy Committee (MPC), which for the first time had to vote twice on how fast to slash borrowing costs after a three-way deadlock.
While the reduction in rates was good news for mortgage holders and other borrowers, economists said the Bank was likely to hold off cutting rates again this year to keep a lid on inflation.
That is expected to peak at 4 per cent next month, up from previous forecasts of 3.5 per cent and more than double the Bank’s target of 2 per cent.
Andrew Wishart, senior UK economist at investment bank Berenberg, highlighted that markets were pricing in a 72 per cent chance of another cut before the end of 2025, down from 100 per cent before yesterday’s decision.
Warning: Bank of England Governor Andrew Bailey (pictured) says subsequent rate cuts must be done ‘carefully’
Predictions of rates staying higher for longer sent the pound up 0.5 per cent against the dollar to $1.34.
Interest rates on two-year UK government debt, which is sensitive to changes in interest rates, climbed higher as investors priced in a slower reduction than before.
Prospects of further cuts this year were dampened after Bank of England governor Andrew Bailey cautioned that subsequent rate cuts must be done ‘gradually and carefully’.
The warning came as the MPC said rising prices are being driven in part by Chancellor Rachel Reeves’s National Insurance Contributions hike and inflation-busting minimum wage increases.
Stubborn inflation increased uncertainty over the pace of future interest rate cuts after the MPC was trapped in a three-way split on the decision.
Four members including Bailey voted to cut borrowing costs by 0.25 per cent to 4 per cent and four wanted to hold rates at 4.25 per cent.
One member, Alan Taylor, voted to cut rates faster, by 0.5 percentage points to 3.75 per cent.
For the historic second poll, Taylor backed a 0.25 percentage point cut to break the deadlock.
Bailey said: ‘We’ve cut interest rates but it was a finely balanced decision. Interest rates are still on a downward path but any future rate cuts will need to be made gradually and carefully.’
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