The Bank of England (BoE) maintained the interest rates at 5.25 percent in June, with two members of the Monetary Policy Committee (MPC) favoring a 0.25 percent cut. While the inflation rate hit the 2 percent target in May, policymakers continued to advise caution towards interest rate cuts.
BoE decided to keep the rates unchanged at 5.25 percent for the seventh consecutive meeting during its June gathering, as widely anticipated by market participants. Seven MPC members voted to maintain the rate, while Swati Dhingra and Dave Ramsden favored a 0.25 percentage point reduction, bringing the rate to 5 percent.
In its statement, policymakers noted that the restrictive monetary policy is weighing on real economic activity, leading to a looser labor market and curbing inflationary pressures. Despite the easing of the labor market, the Bank of England highlighted that it remains tight by historical standards.
Timing of the rate decision, inflation developments
The MPC emphasized that the upcoming U.K. general election on 4 July did not influence the rate decision, which some members considered “finely balanced.”
On the inflation front, the Consumer Price Index (CPI) met the 2 percent annual inflation target in May for the first time in nearly three years. However, services inflation, a key indicator for the central bank, exceeded expectations. Services CPI inflation stood at 5.7 percent in May, down from 6.0 percent in March but still higher than projected in the May report. Meanwhile, core goods price inflation was weaker than anticipated.
Some members cautioned that the return to 2 percent CPI was not necessarily indicative of a sustained return to target. Looking ahead, the Bank of England expects inflation to rise slightly in the second half of the year as the previous year’s decline in energy prices drops out of the annual comparison.
Read more: U.K.’s economic recovery bolstered as GDP surges in January
Monetary policy stance
The bank reiterated that monetary policy must remain restrictive for a sufficiently long period to ensure inflation returns to the 2 percent target sustainably in the medium term, in line with the MPC’s remit. Dhingra and Ramsden, who advocated for a rate cut, argued that easing the Bank Rate now would facilitate a smooth and gradual policy transition, considering transmission lags.
The current Bank Rate is now 3.25 percentage points above the annual inflation rate, marking the highest real interest rate in the United Kingdom since October 2007.
Market reactions
Traders slightly increased their bets on a potential rate cut at the Bank of England’s August meeting, with interest rate futures pricing in about 20 basis points of cuts. Markets are pricing in 47 basis points of cuts this year, suggesting another reduction by year-end.
Gilt yields dropped sharply, with the policy-sensitive 2-year gilt yield falling to 4.13 percent, the lowest in three months. The 10-year gilt yield also fell to 4.04 percent, the lowest since 10 April.
The British pound weakened below 1.27 against the U.S. dollar, while the euro gained slightly to 0.8450 versus the sterling. The FTSE 100 index rose by 0.2 percent after the announcement, eyeing its highest daily close since 10 June. Top performers included Fresnillo, Land Securities, and JD Sports Fashion, with gains of 3.7 percent, 3.1 percent, and 3 percent, respectively.
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