Chancellor warns Bank of England against cutting interest rates too quickly warning inflation could spike again

9 May 2024, 23:40

By Kieran Kelly

@kellyjourno

The Bank of England should avoid cutting interest rates too quickly or risk another inflation spike, Chancellor Jeremy Hunt has warned.

It comes after the Bank announced it is keeping the base rate of interest on hold at a 16-year-high of 5.25%.

The Bank of England maintained interest rates at 5.25% at its May Monetary Policy Committee (MPC) meeting.

However, governor Andrew Bailey has signalled optimism that it may soon be able to cut rates, possibly in June.

Mr Hunt has warned against moving too quickly, saying he would “much rather they waited until they’re absolutely sure inflation is on a downward trajectory”.

The Chancellor, Jeremy Hunt, will join Nick Ferrari at Breakfast from 7am. Listen on Global Player, the official LBC app.

“What we want is sustainably low interest rates, and I think what’s encouraging is that the Bank of England governor, for the first time, has expressed real optimism that we’re on that path,” the Chancellor said.

The committee voted by a majority of seven to two to keep rates unchanged. Members Dave Ramsden and Swati Dhingra voted to cut rates by 0.25 percentage points.

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Mr Bailey said: "We've had encouraging news on inflation and we think it will fall close to our 2% target in the next couple of months.

"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."

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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%, before cutting rates.

Inflation is expected to fall more than previously thought over the coming years, the Bank of England has projected, dropping below its 2% target to 1.5% in 2026.

Headline Consumer Price Index (CPI) inflation is expected to fall below the Bank's 2% target between April and June, but rise again to 2.6% 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% for 2025 and 1.5% in 2026, down 0.25 and 0.5 percentage points respectively on February estimates.

The projection came in the Bank's May Monetary Policy Committee (MPC) report, which signalled optimism from recent falls in retail inflation.

The report said persistently high interest rates had helped push headline inflation down, as the MPC voted again to maintain rates at 5.25%.

The pound fell against the US dollar and euro after the Bank of England signalled growing support for an interest rate cut among policymakers.

Sterling fell 0.3% to 1.246 US dollars and was 0.2% lower at 1.161 euros.