Hopes of up to six interest rate cuts this year to fuel a feel-good factor ahead of a General Election have been quashed.
In January, City traders were hopeful the Bank of England would start to cut the base rate from 5.25 percent in June with futher reductions before Christmas.
The forecasts were built on expectations that inflation would fall to the target of 2 percent and stay there or fall further.
However, there are now concerns that an initial fall to 2 percent could be followed by increases later this year.
There is growing evidence of a rift among members of the Bank of England Monetary Policy Committee (MPC) over when rate cuts should come.
Earlier this week one MPC member, Megan Greene, said any reductions “should still be a way off”.
This echoed comments made from another member of the committee, Jonathan Haskel, who cautioned in a recent interview with the FT that interest rate cuts should be “a long way off”.
As things stand these two Bank of England advisors are in the minority on the MPC.
The views of Greene and Haskel are at odds with the Bank’s governor, Andrew Bailey, who just last month said rate cuts were “in play” at future MPC meetings.
The resulting uncertainty has led City traders to dramatically scale back expectations on rate cuts.
That will be bad news for those carrying mortgages and other credit. While some economists warn and delay in rate cuts will stifle the economy and growth.
City traders are now suggesting that the first rate cut will not come until August or September with one more before the end of the year.
Megan Greene, one of the more hawkish members of the BoE’s monetary policy committee, said there are conditions specific to the UK which mean inflation will remain above the 2 percent target, so making interest rate cuts here more difficult.
These, she said, are a “double whammy” of a very tight labour market, which means potentially inflationary wage rises, and a far bigger energy price shock.
As a result, she said that “inflation persistence” is a greater threat than in the US or other advanced economies.
