The Bank of England boss has said it needs to “see more evidence” that price rises have slowed further before cutting interest rates.

Andrew Bailey said he was “optimistic that things are moving in the right direction” as rates were held at 5.25%.

He said the Bank expected inflation, which measures the rate prices rise at, would fall “close” to its target level in the next couple of months.

It paves the way for an interest rate cut as early as June.

However, August or September seem to be the most likely timing.

The interest rate set by the Bank dictates the rates set by High Street banks and money lenders. Rates are currently at their highest level for 16 years which has meant people are paying more to borrow money for things such as mortgages and loans, but savers have also received better returns.

Mr Bailey said there had been “encouraging news” on inflation, currently at 3.2%, but said it needed “more evidence” it would stay low before cutting rates.

The nine-strong Monetary Policy Committee, which votes on rates, appeared to be edging closer towards a cut with two voting for reducing rates and the remaining seven for hold.

The Bank was more positive on the prospects for the UK economy in its latest forecast, predicting

Following the Bank’s latest comments, financial markets now expect rates to be cut to 5% by August and then trimmed to 4.75% in November or December. More rate cuts are predicted for 2025.

The Bank started raising rates in December 2021 and has kept interest rates at 5.25% since last summer in an attempt to slow the pace at which consumer prices have been rising – and to ease the cost of living.

Prices starting rising quickly as demand for goods increased when Covid-related restrictions were lifted. Energy and food prices then soared following Russia’s invasion of Ukraine, leading to inflation rising over 11% in October 2022 – its highest rate in 40 years.

Electricity and bills have since fallen but are not expected to fall further.

By making borrowing more expensive, the Bank hopes to encourage people to cut back on spending which in turn leads to demand for goods falling and price rises easing.

But it is a balancing act, as high interest rates can harm the economy and restrict growth, as businesses hold off on investing in production and jobs.

The UK fell into recession at the end of last year when the economy shrank for two consecutive three-month periods, but the Bank said it believed the downturn might already be over with official figures released on Friday expected to confirm this.

The Bank said it expected the economy to perform slightly better this year, partly due to the size of the population increasing and some measures in the government’s spring Budget, such as the cut to National Insurance.

“Consumer confidence has been on an upward trend during most of the past year,” the Bank said, but added that businesses investment remained “subdued” due to lower demand and “uncertainty”.

The Bank said that after adjusting for pensions, the amount households were saving has increased to its highest level since 1997, excluding the pandemic.

The health of UK economy has been in the spotlight with economic policies likely to be a key battleground in the quest for votes in the upcoming election, expected by the end of this year.

Prime Minister Rishi Sunak has previously said that 2024 would “prove to be the year that the economy bounces back”, and that the country had “turned a corner” – but many households’ budgets remain under pressure.

But Labour has accused the government of “gaslighting” the public over the state of the economy.