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The Bank of England kept interest rates unchanged at 5.25% in a “delicately balanced” decision that dashed Conservative hopes of a boost to personal finance just two weeks before the 4th election July in the UK.
But the BoE signaled a rate cut could come as soon as its next meeting in August, prompting traders to increase bets on a rate cut in the summer.
Thursday’s 7 to 2 decision by the Monetary Policy Committee, in line with economists’ expectations, left interest rates at a 16-year high.
It came despite data a day earlier showing headline inflation fell to the BoE’s 2% target for the first time in three years. However, services inflation was higher than expected at 5.7%.
“The good news is that inflation has returned to our 2% target,” BoE Governor Andrew Bailey said. “We need to make sure that inflation stays low and that is why we have decided to keep interest rates at 5.25% for now.”
Minutes of the meeting showed that some MPC members who voted to leave interest rates unchanged rated the decision as “delicately balanced,” a sign they were about to vote for a cut. They asserted that services inflation in May “did not significantly alter the deflationary trajectory the economy is on.”
Bailey is one of the committee members who seems most confident that inflation is moving in the right direction.
But other members who voted to leave interest rates unchanged called for “more evidence that inflation is fading” before cutting rates.
BoE deputy governor Sir Dave Ramsden and external MPC member Swati Dhingra echoed earlier votes for immediate cuts.
The BoE’s decision will disappoint Chancellor Rishi Sunak, who has claimed credit for falling inflation and said his government had paved the way for interest rate cuts.
The MPC’s statement suggested that it could cut interest rates at its August 1 meeting – after the election. It noted that members will then consider how economic data “influences the assessment that risks from sustained inflation are fading”.
Traders are now pricing in a more than 40% chance of the BoE’s first quarter-point cut at its August meeting, up from about a third before Thursday’s announcement.
The British pound fell 0.2% against the dollar to $1.2688 following the decision. The interest rate-sensitive 2-year gilt yield fell 0.06 percentage point to 4.13%.
Adding to the uncertainty about the August meeting is the imminent departure of deputy governor Ben Broadbent, who will be succeeded at the MPC by Clare Lombardelli.
The BoE’s decision puts it behind the European Central Bank and the Bank of Canada, which have begun lowering interest rates.
In contrast, the US Federal Reserve has also kept interest rates unchanged so far, with its latest forecast suggesting it may cut just once this year.
