Bank of England holds rates steady ahead of UK election

LONDON - The Bank of England kept its main interest rate unchanged at a 16-year high of 5.25 per cent on Thursday ahead of a July 4 election, but some policymakers said their decision not to cut rates was now “finely balanced”.

The BoE’s Monetary Policy Committee voted 7-2 to keep rates on hold, in line with economists’ expectations in a Reuters poll. Deputy Governor Dave Ramsden and external MPC member Swati Dhingra remained the only policymakers to support a cut to 5 per cent.

BoE Governor Andrew Bailey said in a statement alongside the decision that it was “good news” that the latest data had shown inflation was back at its 2% target, but that it was too soon to cut rates.

“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,” he said.

Bailey’s statement differed from last month, when he said he was “optimistic” that data was moving in the right direction for a rate cut.

Sterling fell against the US dollar after the announcement and British government bond prices dropped as investors saw a greater chance of an early rate cut. Markets priced in an 88 per cent chance of a first quarter-point cut by September’s meeting, up from 74 per cent before Thursday’s decision.

The BoE vote follows a long-trailed decision by the European Central Bank earlier this month to start to cut rates, while financial markets do not expect the U.S. Federal Reserve to lower borrowing costs until late this year.

A Reuters poll of economists published last week showed most expected a rate cut on Aug 1 after the BoE’s next rate decision.

“We still expect the MPC to cut rates in August but this is not a done deal - they remain very data-driven so the evolution of key indicators over the coming month will be key,” said Alpesh Paleja, interim deputy chief economist at the Confederation of British Industry.

Any cut is likely to be too late for Prime Minister Rishi Sunak, whose Conservative Party is around 20 points behind the opposition Labour Party in the pre-election polls.

While Sunak has sought credit for the fall in inflation since he took office in October 2022, when it was at a 41-year high of 11.1 per cent, Labour blames high mortgage rates on economic mismanagement by the Conservatives’ previous leader, Liz Truss.

The BoE said the upcoming election had no impact on its decision.

The BoE expects inflation to rise above target as the effect of past energy price falls drops out of annual inflation data, and repeated its May forecast for inflation to be around 2.5 per cent in the second half of 2024.

In a sign the central bank may be getting closer to cutting rates, the BoE policy minutes said the decision to keep rates on hold had been “finely balanced” for some MPC members.

The BoE said indicators of inflation persistence - chiefly wage growth and services inflation - had moderated since its May meeting but remained high.

Services price inflation has fallen less than the BoE expected at its May meeting - only declining to 5.7 per cent rather than 5.3 per cent - and private-sector wage growth is almost twice the rate the BoE judges as compatible with 2 per cent inflation.

Since the start of the election campaign the BoE has been in a self-imposed period of silence, cancelling public events.

Before that, BoE Chief Economist Huw Pill described an excessive focus on a June rate cut as “ill advised” but both he and Deputy Governor Ben Broadbent - who steps down at the end of this month - said a rate cut over the summer was possible.

The BoE began to raise rates in December 2021, earlier than other major central banks, and they reached their current peak in August 2023. REUTERS