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The Bank of England’s “delicately balanced” decision to keep interest rates unchanged at 5.25% just two weeks before the UK’s July 4 general election, dealt a blow to Conservative hopes of improving personal finances.
However, the Bank of England hinted that a rate cut could come as early as its next meeting in August.
The 7-2 decision by the Monetary Policy Committee on Thursday was in line with economists’ expectations and pushed interest rates to their highest level in 16 years.
Data released the previous day showed headline inflation fell to the Bank of England’s target of 2% last month for the first time in three years, but services inflation was above expectations at 5.7%.
“It’s good news to see that inflation is back at our 2 percent target,” Bank of England Governor Andrew Bailey said. “We need to be confident that inflation will remain low, which is why we have decided to keep rates unchanged at 5.25 percent for now.”
According to the minutes, some MPC members who voted to keep rates on hold judged the decision “finely balanced” and signaled they would vote to cut rates. They argued that May’s rise in services prices “did not materially alter the deflationary trajectory the economy was on.”
Bailey was one of the committee members who said he was most confident that inflation was moving in the right direction.
However, other committee members who voted to keep rates unchanged called for “further evidence of a decline in the persistence of inflation” before cutting rates.
Bank of England Deputy Governor Dave Ramsden and Swati Dhingra, an outside member of the policy committee, reiterated their previous vote for an immediate rate cut.
The Bank of England’s decision will come as a disappointment to Chancellor Rishi Sunak, who has claimed credit for falling inflation and suggested the government had paved the way for interest rate cuts.
The MPC statement signalled a rate cut was likely at its August 1 meeting, noting that members would then consider how economic data “has influenced our assessment that the risks from persistent inflation are receding”.
Following the decision, the pound fell 0.3 percent against the dollar to $1.2679, while the yield on interest-sensitive two-year government bonds fell 0.06 percentage point to 4.13 percent.
Traders now see a more than 40% chance of the Bank of England cutting interest rates by a quarter of a percentage point at its August meeting, up from about one-third before Thursday’s announcement.
Adding further uncertainty to the August meeting is the imminent retirement of Deputy Governor Ben Broadbent, who will be replaced by Clare Lombardelli on the MPC.
The Bank of England’s decision puts it behind the European Central Bank and the Bank of Canada, which have already started cutting interest rates.
In contrast, the US Federal Reserve has also kept interest rates on hold for now, with its latest forecasts suggesting there may only be one rate cut this year.
