The Bank of England (BoE) 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, which was in line with economists’ expectations, 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.
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“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.”
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. They maintained that May’s services inflation “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.
But other members who voted to keep rates on hold called for “more evidence of diminishing inflation persistence” before rate cuts.
Deputy BoE governor Sir Dave Ramsden and external MPC member Swati Dhingra repeated previous votes for an immediate cut.
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.
The MPC’s statement suggested it could cut rates at its August 1 meeting — after the election. It noted that members would then consider how economic data “affected the assessment that the risks from inflation persistence were receding”.
Traders are now pricing in a more than 40 per cent chance of a first quarter-point cut at the BoE’s August meeting, up from roughly a third before Thursday’s announcement.
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.
Adding to the uncertainty about the August meeting is the imminent departure of deputy governor Ben Broadbent, who will be succeeded on the MPC by Clare Lombardelli. 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. - Copyright The Financial Times Limited 2024
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