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The Bank of England has kept interest rates on hold at 5.25 per cent in a “finely balanced” decision that dented Conservative hopes of a boost to personal finances just two weeks before the UK’s July 4 election.
But the BoE signalled a reduction was possible as soon as its next meeting in August, prompting traders to increase their bets on a summer rate cut.
Thursday’s seven-to-two decision by the Monetary Policy Committee was in line with economists’ expectations and leaves rates at a 16-year high.
It came despite data the day before showing that headline inflation fell to the BoE’s target of 2 per cent for the first time in three years. However, services inflation was higher than expected at 5.7 per cent.
“It’s good news that inflation has returned to our 2 per cent target,” said Andrew Bailey, the BoE’s governor. “We need to be sure that inflation will stay low and that’s why we’ve decided to hold rates at 5.25 per cent for now.”
The BoE’s decision will come as a disappointment to Prime Minister Rishi Sunak, who has claimed credit for falling inflation and suggested his government has paved the way to rate cuts.
Traders are now pricing in a more than 40 per cent chance of a first quarter-point cut at the BoE’s August 1 meeting — after the election — up from roughly a third before Thursday’s announcement.
Minutes of the meeting showed that some MPC members who voted to hold rates judged the decision “finely balanced”, in a sign they are getting close to voting for a cut.
Despite the higher services inflation figure for May, the group maintained that this “did not alter significantly the disinflationary trajectory that the economy was on”.
Bailey has been among the committee members who have sounded most confident that inflation is heading in the right direction.
Jens Larsen, an economist at Eurasia Group, a consultancy, said the bank was sending a “pretty strong signal” that its rate-setters are ready to vote for a reduction on August 1. “Monetary policy is clearly restrictive, and you can easily argue for some easing,” he said.
However, August’s decision is still likely to be close. Members who voted to keep rates on hold on Thursday called for “more evidence of diminishing inflation persistence” before rate cuts.
The MPC’s statement stressed the importance of the inflation forecast that will be released at its August meeting, suggesting that more officials might back a rate cut if it points to sustainably low price pressures.
Adding to the uncertainty is the imminent departure of deputy governor Ben Broadbent, who will be succeeded on the MPC by Clare Lombardelli.
Sterling was down 0.2 per cent against the dollar to $1.2688 after the decision. The yield on the interest rate sensitive 2-year gilt was down 0.06 percentage points at 4.13 per cent.
The BoE’s decision leaves it lagging behind the European Central Bank and the Bank of Canada, which have already begun lowering interest rates.
By contrast, the US Federal Reserve has also kept rates on hold so far, with its latest forecasts suggesting it may only cut once this year.
