The Bank of England kept interest rates on hold at 5.25% for the seventh consecutive session, describing it as a “delicately balanced” decision.
Dumping hopes that Governor Rishi Sunak would cut borrowing costs before the general election, a majority of the Bank of England’s Monetary Policy Committee (MPC) said they wanted to see further evidence that price growth remains subdued.
Financial markets had anticipated the decision, even though inflation in May fell below the central bank’s 2% target.
Bank of England Governor Andrew Bailey said: “It is good news to see inflation back towards our 2 per cent target. We need to make sure inflation remains low so we have decided to keep interest rates unchanged at 5.25 per cent for the time being.”
Bailey was one of seven of the nine MPC members to vote to keep rates on hold, with Swati Dhingra and Dave Ramsden in favour of a 0.25 percentage point cut to 5%.
But for some who voted to freeze rates, the decision was a “delicate balance”, according to policy committee minutes, suggesting the possibility of cutting rates was being seriously considered.
The bank was “keeping the door open” to a rate cut in August, said Ruth Gregory, deputy chief UK economist at consultancy Capital Economics. She said minutes of the Monetary Policy Committee meeting showed policymakers wanted to ensure inflationary pressures subside.
“we [these words] “This is a sign that the bank is prepared to cut interest rates in August if the data develops as expected,” she said.
“Assuming there are no surprises in its next inflation report in mid-July, we expect the bank to be in favour of a rate cut in August,” said James Smith, developed markets economist at ING.
Savers will welcome the interest rate freeze, but many mortgage payers and indebted small businesses will need to take out loans at historically high interest rates.
Millions of homeowners have been forced to refinance their mortgages at much higher interest rates over the past 18 months, a figure that could total £12 billion by the end of the year, according to think tank the Resolution Foundation.
David Ballier, head of research at the British Chambers of Commerce, said banks’ cautious stance was holding back business investment.
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“A cut in interest rates will provide welcome breathing space for the businesses we represent across the UK. Our research shows that business concerns about borrowing costs have eased, but they remain at historically high levels. Many businesses are reporting that high borrowing costs are causing them to hold back on investment, which is undoubtedly a drag on overall economic growth.”
The bank’s own survey of investors found that just 50% expected a rate cut when the Monetary Policy Committee met in August, with three-quarters of respondents expecting a cut in September.
Headline inflation fell to 2% in May, while services inflation was at 5.7%, down only slightly from 5.9% in April.
In the minutes of the Monetary Policy Committee meeting, members said the economy grew faster than expected earlier this year and that pace is likely to continue into 2021. Bank officials project GDP growth of 0.5% in the second quarter of 2024, faster than the 0.2% forecast at the bank’s last rate decision in May.
The company said part of the first-quarter growth was due to increased government spending, leading to a stronger recovery from last year’s recession.
Policy board members are concerned that wages aren’t falling fast enough to prevent companies from raising prices this fiscal year. Higher energy prices expected in the fall could also push up inflation again.
