The Bank of England’s Monetary Policy Committee (MPC) announced today that it will be maintaining interest rates at 5.25% for the seventh consecutive month. This decision comes after the latest official figures revealed that inflation had fallen to the Bank’s target of 2% for the first time in almost three years.
Despite expectations for a potential rate cut, the MPC voted 7-2 in favor of holding rates while two members supported a 0.25 percentage point reduction. Governor Andrew Bailey stated that the committee needs to have confidence in the sustainability of low inflation before making any changes to the current rate.
Following this decision, market expectations for a rate cut in August have decreased to 44%, with a 56% chance of another hold. However, the market’s anticipation of a rate cut in September remains high at 71%.
Some members of the MPC expressed the need for more evidence of diminishing inflation persistence before considering a rate cut. On the other hand, two members, Swati Dhingra and Dave Ramsden, voted for a reduction, citing the expectation that inflation will remain at normal levels.
The panel also emphasized that the upcoming general election on July 4th did not play a role in their decision.
The Bank had been gradually increasing interest rates since December 2021 in an effort to combat rising inflation caused by the COVID pandemic and conflict in Ukraine. In October 2022, inflation peaked at 11.1%, the highest level since 1981. While inflation has since decreased, concerns remain about the potential for it to rise again later this year.
The Office for National Statistics (ONS) released data yesterday showing that services inflation, which includes industries such as hospitality, had only fallen to 5.7% in May, lower than expected. This caused financial markets to push back their expectations for the first rate cut of the year.
The ONS also reported that the UK’s consumer prices index (CPI) rate of inflation for the year to May was the lowest since July 2021. This was largely due to a decrease in food prices, while the cost of motor fuel saw a slight increase.
Economist Ruth Gregory from research firm Capital Economics believes there is still a “good chance” of a rate cut in August, with rates potentially dropping to 3% by next year. She added that the Bank’s decision to hold rates was expected given recent positive surprises in services CPI inflation and wage growth, as well as the upcoming election.
However, Ms. Gregory noted that the language in the Bank’s latest minutes suggests that the MPC is open to making a move in August, and the decision to hold rates was “finely balanced” among its members.
Not everyone was pleased with the decision, as some expressed disappointment and frustration. Jonathan Bone, a mortgage adviser at Better.co.uk, criticized the Bank for being “obstinate” and “unwilling to take action despite widespread criticism.” He added that those with mortgages are desperate for relief.
The Federation of Small Businesses also voiced disappointment, with National Chair Martin McTague stating that the high interest rates are hindering growth for small businesses as they struggle to access affordable finance. He believes that holding off on a rate cut until a later date could potentially harm the tentative signs of economic recovery, with flat growth in April serving as a warning sign.
This decision comes after the European Central Bank cut interest rates earlier this month, despite eurozone inflation rising from 2.4% to 2.6% in May.