The Bank of England (BoE) has decided to keep interest rates unchanged for the sixth consecutive time, aligning with both market and analyst predictions.
Despite differing viewpoints among its members, the bank’s decision mitigates the potential for an early rate cut, even in the face of encouraging inflation data. Consequently, the cost of borrowing will continue to be at a 16-year high.
In a vote of seven to two, the bank’s Monetary Policy Committee (MPC) decided to keep the benchmark rate at 5.25 percent.
The Monetary Policy Committee voted by a majority of 7-2 to maintain #BankRate at 5.25%. Find out more in our #MonetaryPolicyReport: https://t.co/2lnXthHbMt pic.twitter.com/HXZdRjxPnl
— Bank of England (@bankofengland) May 9, 2024
Deputy governor Sir Dave Ramsden and external member Swati Dhingra voted for an immediate rate cut.
However, BoE Governor Andrew Bailey stated that a downward adjustment could be considered as early as the June committee meeting.
Bailey acknowledged positive developments in inflation, predicting that it would approach the bank’s 2 percent target in the coming months.
Nonetheless, he emphasized the need for further evidence of sustained low inflation before implementing interest rate cuts, expressing optimism about the overall direction of the situation.
The bank’s signaling of a potential policy easing led to a 0.4 percent decline in the value of the pound against the dollar, reaching $1.2449.
Economists surveyed by Reuters had anticipated only one vote in favor of a rate cut.
Read more: BoE maintains interest rate unchanged at 5.25 percent for fourth consecutive time
Evaluation of upcoming data releases
Furthermore, the bank hinted at the possibility of rate cuts in the near future if inflation aligns with its forecasts.
The MPC stated that it would evaluate upcoming data releases, specifically inflation and employment figures, to assess whether the risks associated with persistent inflation are diminishing.
These data points are expected to be published prior to the committee’s next meeting on June 20, with the subsequent meeting scheduled for early August.
The timing of the first interest rate cut by the BoE in four years has acquired significant political significance ahead of the anticipated general election later this year.
Prime Minister Rishi Sunak aims to convince voters that the U.K. has made progress in addressing the cost of living crisis.
However, the Central Bank is exercising caution in avoiding premature action due to its hard-fought battle to bring inflation down from double-digit levels to the current rate of 3.2 percent.
Mixed views on the persistence of inflation
The minutes of the recent meeting highlighted the existing divisions within the MPC, noting a “range of views” regarding the likely persistence of inflation and the amount of evidence required to support a rate cut.
The committee also acknowledged that service price inflation remains high at 6 percent and that the uncertain nature of official job statistics makes it challenging to assess the evolution of the labor market.
As a result of the bank’s indications of potential rate cuts this summer, interest rate-sensitive two-year gilt yields decreased by 0.03 percentage points to 4.28 percent, while the FTSE 100 index of leading stocks rose by 0.4 percent on expectations of rate reductions.
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