The Bank of England (BoE) has sustained the current 5.25 per cent interest rates, in a very close decision that undermines the Tory party’s aspirations for a boost in individual finances just a fortnight before the July 4 UK election. The BoE, however, hinted at a potential rate cut on their next meeting slated for August, which led traders to speculate about a possible cut in summer rates.
In alignment with economist predictions, the Monetary Policy Committee’s Thursday resolution of seven to two has maintained the rates at their highest in 16 years. This move came despite inflation figures being released the preceding day showing it had reached the BoE’s 2 per cent target for the first time in three years. On the other hand, services’ inflation at 5.7 per cent was above the anticipated figure.
Andrew Bailey, the governor of the BoE, welcomed the return of inflation to their 2 per cent target. He argued, however, that they must ensure that inflation remains low and therefore have chosen to maintain the current rate of 5.25 per cent.
Minutes from the meeting reveal that some MPC members who voted to maintain the rates believed the decision was a close one and were leaning towards a rate cut. These members argue that the May services inflation “did not significantly change the disinflationary course of the economy”.
Members who decided to maintain the rates are looking for more proof of lessened inflation persistence before consideration of rate cuts. For instance, Sir Dave Ramsden, Deputy BoE governor and Swati Dhingra, an external MPC member voted for an instant cut.
This decision by the BoE will likely upset Prime Minister Rishi Sunak who has been attributing falling inflation to his government’s actions and for paving the way for rate cuts.
The MPC intimated the possibility of a rate cut during its August 1 meeting, post-election. Members will assess how economic statistics “impact the assessment that the risks from inflation persistence were receding”. Traders now anticipate more than a 40 per cent chance of a quarter-point cut in the BoE’s August meeting, up from just below a third prior to Thursday’s announcement.
The UK Pound fell by 0.2 per cent to $1.2688 against the US dollar following a recent decision. Furthermore, the yield on the 2-year gilt sensitive to interest rate decreased by 0.06 percentage points, settling at 4.13 per cent.
There’s a sense of uncertainty looming as Ben Broadbent, the deputy governor, is about to leave, and Clare Lombardelli is set to take over his position in the MPC. This has put the Bank of England behind the European Central Bank and the Bank of Canada, both of which have already started to reduce interest rates.
On the other hand, the US Federal Reserve, unlike the other banks, has maintained its rates so far. The latest predictions indicate it might only make a single cut this year. This article is protected by The Financial Times Limited Copyright 2024.