UK interest rates: Bank of England set to hold rates despite inflation hitting 2%

Borrowers hoping for some relief from higher costs are likely to be disappointed by expectations that UK interest rates will not be cut on Thursday, despite inflation returning to target.

Most economists are expecting policymakers to hold UK interest rates at 5.25 per cent when the central bank announces its latest decision.

The announcement will come a day after official figures showed that inflation returned to the 2% target last month, for the first time since July 2021.

Inflation has fallen back to the 2 per cent target for the first time in nearly three years in a boost for prime minister Rishi Sunak’s faltering election campaign.

The Office for National Statistics figures show the Consumer Prices Index (CPI) dropped to 2 per cent in May, down from 2.3 per cent in April.

The new figure marks the first time inflation has been at the Bank of England’s target since July 2021, before the cost-of-living crisis saw inflation shoot up – at one stage hitting levels not seen for 40 years.

Experts have cautioned that a rate cut this summer could be less likely until the majority of the Bank’s Monetary Policy Committee (MPC) feel certain that inflation is under control.

Crucially, the rate of services inflation, which looks only at service-related categories like hospitality and culture, and is a key gauge for policymakers, has remained more stubborn than expected.

James Smith, developed economist for ING bank said: “Indeed at 5.7 per cent, services inflation is now 0.4 percentage points above the Bank’s forecast from the May Monetary Policy Report.

“That all but confirms the Bank of England will keep rates on hold on Thursday. We’re therefore sticking to our call for the first rate cut to come in August, with a total of three cuts this year.”

Laura Suter, director of personal finance at AJ Bell, added: “It’s highly likely the Bank will want to wait to see the outcome of the election and the final economic plans before making that first cut.

“With no meeting in July, that means all eyes are now firmly on the August MPC meeting for our first potential cut to rates.”

The Bank of England (BoE) is set to hold interest rates at the current level despite inflation falling back to the 2 per cent target for the first time in nearly three years.

The UK’s central bank is expected to freeze interest rates at 5.25 per cent on Thursday after steadily increasing rates since 2021 in an effort to bring down inflation.

It comes after the Office for National Statistics revealed the Consumer Prices Index (CPI) dropped to 2 per cent in May, down from 2.3 per cent in April.