Bank of England policymakers are expected to hold interest rates at 5.25% when they meet today, but a rapid fall in inflation could mean a cut in the cost of borrowing comes as early as June. Analysts said revised forecasts for inflation were likely to show a steep drop in prices growth over the next six months, prompting bets in financial markets that the Bank’s monetary policy committee (MPC) will make several cuts to interest rates in the second half of the year. In a move to dampen speculation about an early rate cut, the governor Andrew Bailey is expected to say that wages growth remains strong and that this could prompt a resurgence of inflation. The escalating conflict in the Red Sea could also hit shipments of goods through the Suez canal, putting upward pressure on prices. Business surveys have shown that companies are more confident about revenues and profits this year and house price surveys have shown the property market beginning to recover from a period of stagnation. However, steep falls in energy and fuel prices from all-time highs last year are due to reduce household bills, lowering the overall rate of inflation this year and giving the Bank room to cut interest rates during the summer. Financial markets have already scaled back the possibility of dramatic cuts in interest rates this year. Until last month, investors were betting on six 0.25 percentage point reductions starting in May, which would push rates to below 4% by the end of 2024. Ahead of the MPC meeting, investors expected the Bank would carry out only four rate cuts from June. Analysts at Investec said the Bank would be even more circumspect than financial markets predict about an early move to reduce interest rates. “Our base case is that the MPC will cut rates three times this year, beginning in June, with the [main] rate ending this year at 4.50%.” Highly indebted businesses and households are likely to be disappointed by predictions of a slow path of interest rate cuts. S&P, the rating agency, has warned that many large corporations that were able to hedge their interest rate costs during the pandemic could find themselves unable to meet debt payments should rates still be high next year. Households that must refinance their mortgages will also be hit by higher bills. Mortgage rates have fallen over the last few months in response to speculation that interest rates will tumble. But this trend could reverse if rates stay high for a longer period. Karen Ward, chief market strategist for Europe at JP Morgan Asset Management, warned the Bank not to focus unduly on falling fuel costs and to resist interest rate cuts unless wages growth falls back. “If the labour market is still generating medium-term inflationary pressures, then cutting interest rates would be the wrong thing to do. Why? Sticky wage growth would be a sign that the labour market and broader economy is already at full capacity. “Falling inflation in itself could lead to a real wage boost and a re-acceleration in spending, above what the economy can cope with. Indeed, there is already some evidence of this re-acceleration in the business surveys. Adding rate cuts might further fuel the underlying capacity problem,” she added.