Reaction as UK central bank keeps rates at 5.25%

UK Central Bank

The UK central bank has kept its main interest rate unchanged at a 16-year high of 5.25% ahead of the July 4 general election — but some of the bank’s policymakers said their decision not to cut rates was now “finely balanced.”

The Bank of England’s Monetary Policy Committee (MPC) voted 7-2 to keep rates on hold.

Deputy Governor Dave Ramsden and external MPC member Swati Dhingra remained the only policymakers to support a cut to 5%.

The central bank’s governor Andrew Bailey said in a statement 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% for now,” said Bailey.

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


Lindsay James, investment strategist at Quilter Investors: “While it will come as a bitter blow to the Conservative party, this decision is no real surprise given month-on-month figures suggest inflation is unlikely to remain at 2% for long.
“It is instead expected to rise again later this year and ultimately settle between 2% and 3%. The Bank will be keeping a keen eye on wage growth, which remains around 6%, as well as services inflation which has been taking its time in coming down and has continued to feed into elevated core inflation.
“With the Labour Force Participation Rate still trending down and at the lowest level since 2015, a worker shortage is one crucial inflationary factor that will need addressing by the incoming government. Given the Bank’s focus on sustainably returning inflation to the target in the medium term, it could be some time yet before we see a cut.
“Until recently, markets had been pricing in several BoE rate cuts this year, with the first previously expected in the summer. Given the hesitation around inflation, it is looking increasingly likely that the first cut will not materialise until November which means we could see just one or two cuts from the BoE this year after all.
“This would put the BoE roughly in alignment with the Federal Reserve, which now expects to make just one rate cut this year, and trailing behind the European Central Bank which has already fired the starting gun.
“Though the headline rate of inflation has lowered, various areas of the economy are still seeing prices rising at a faster rate than the 2% target. What’s more, the high cost of living is still biting, meaning households are unlikely to be feeling any better off.
“With interest rates unlikely to fall for some time yet, and the prospect of lower rates later in the year so far having little impact on mortgage rates and long-term debt agreements, consumers and businesses will continue to carry the burden.”

Kevin Brown, savings specialist at Scottish Friendly: “This is not an unexpected course of action from the Monetary Policy Committee (MPC). Policymakers are facing many mixed signals in the economy right now, so have decided to sit on the fence until the picture becomes clearer.

“With the economy stalling and inflation at target, many might well be wondering what the hold-up is. But key parts of the inflation data are still sticking higher, including core and services inflation. This will be the key to their hesitancy, alongside persistent above-inflation wage growth.

“The likelihood now is, as we have a Summer break of sorts, that the MPC will reconvene in August to observe the lay of the land, where we’re likely to see a first cut, assuming inflation doesn’t tick up again.

“This is of little comfort to families continuing to struggle with higher rates on key things such as mortgages or other debt as pressure on their finances will persist. Savers, it would seem, have something of a reprieve, but how long that lasts as a rate cut looks increasingly inevitable remains to be seen.”

Daniel Mahoney, UK Economist at Handelsbanken: “While the UK’s inflation rate has recently fallen to the Bank of England’s 2% inflation target, the rate is expected to rise by year end due to base effects in the energy component of inflation and it is notable that services inflation has surprised to the upside in both April’s and May’s CPI print.

“This has stopped the majority of MPC members backing a rate cut, but there are now two clear schools of thought emerging among these members. One school of thought is that higher than expected services inflation is pointing to second-round effects maintaining persistent upward pressure on inflation.

“The other, much more sanguine view, is that recent strength in services inflation has been prompted by factors such as volatile components and the large increase in the National Living Wage, which will not end up embedding into medium-term inflation. MPC members subscribing to this view have indicated that the policy decision “was finely balanced”, suggesting a number of additional members were very close to backing a rate cut at this meeting …

“Even though this decision has taken place during a general election campaigning period, this will not have affected the votes of MPC members. The MPC have been very clear that their decisions at this and other meetings are data dependent.

“Given there were clearly a number of rate-setters close to joining the two members backing rate cuts, it would seem that the minutes of June’s MPC meeting are indicating that a rate cut in August remains very much on the cards. Indeed, we remain of the view that August will mark the start of the rate cutting cycle, although this prediction is contingent on the next set of labour market and inflation data prints not throwing up any surprises.”

Neil Shah, Director of Research at Edison Group: “As one of the most politically sensitive monetary policy decisions in years, it’s no surprise that the BoE voted to leave interest rates at 5.25%, the highest figure in 16 years. Despite inflation falling to 2% in May, hitting the BoE’s target and offering a glimmer of hope for the doves, the hawks have prevailed.

“The bank remains wary of lingering inflationary pressures, choosing caution over a cut that could bolster Sunak’s claims of economic recovery. With a government change anticipated this July, and Labour pointing out that despite the fall in inflation, family finances are still under significant pressure, a rate cut is likely on the horizon for later this year.”

Kathleen Brooks, research director at XTB: “The BOE maintained rates today at 5.25%, which was widely expected by the market. However, the monetary policy summary from today’s meeting was interesting. The key section was at the end: ‘As part of the August forecast round, members of the Committee will consider all of the information available and how this affects the assessment that risks from inflation persistence are receding.’

“This sounds like there are several MPC members ready to cut rates and that there is a decent chance that if we see wage growth and service prices recede in the next month, then an August rate cut is possible …

“The vote split at today’s meeting was 7-2. With Dhingra and Ramsden voting for a cut and the other 7 members voting to hold rates steady. The minutes of the June meeting said that there was a range of views regarding the risks of inflation persistence. Some members believe that inflation risks could turn to the downside as quickly as they turned to the upside.

“However, other members worry that there has been a structural shift in wage-setting behavior which could keep upward pressure on service price inflation in the long term. The Committee also noted that the higher frequency measures of service price inflation had picked up in the three months to May. Thus, those who are urging caution when it comes to rate cuts have the evidence to back it up.

“However, the Minutes also noted that for some members the decision to hold rates steady was finely balanced as they noted that the disinflation trend was continuing even with stubbornly high wages and service prices. These members are willing to look through high pay growth and high levels of service price inflation and they are more worried about the outlook for growth.

“Dhingra and Ramsden, the two doves at the BOE, need to bring three more members onto their side to get a narrow majority to agree to a rate cut in August. Since some members are said to be finely balanced about whether to hike or cut rates, the prospect of them getting the numbers to push through a rate cut in August seems possible …

“The market reaction has been swift. The market has taken today’s news as a step in the direction of a rate cut at the next BOE meeting. The market is now pricing in a 60% chance of a rate cut in August, up from a 35% chance before the meeting, according to the swaps market. 2-year UK Gilt yields are down nearly 9 basis points, and the pound is lower vs. the USD.

“The market can bask in its hopes for a rate cut, as MPC members will now enter a quiet period until after the election, so they won’t have any members pouring cold water on their hopes for a rate cut in 6 weeks …

“To sum up, the BOE’s statement and minutes have kept ajar the door for an August rate cut, as they have acknowledged the progress made on inflation to reach the 2% target.

“Although they remain committed to inflation returning sustainably to the 2% target rate, they did give some decent excuses for the elevated levels of service price inflation, including prices that are set annually and other indicators that suggest wage growth could ease in the coming months.

“The market is taking this as a dovish sign, and are increasing their bets for an August rate cut.”

Susannah Streeter, head of money and markets, Hargreaves Lansdown: “The Old Lady of Threadneedle Street is not for turning, and is still training a beady eye on hot prices in parts of the economy, even though headline inflation has hit the 2% target. There is not sufficient data yet in the bag to prompt more members of the MPC to vote for an interest rate cut, but hopes are now building that one may come in August.

“Seven voted for the rate to be held, amid concerns about persistently high services inflation, with just two calling for a cut, just like last month. However, for some policymakers it was a finely balanced decision, an indication that they could be swayed in August.

“While it’s clear from the latest economic snapshot from the ONS today that disinflationary forces have built up across the economy, with vacancies falling and consumers more cautious about spending, some policymakers are still a bit worried this trend may run out of steam, especially if wage growth stays stubborn.

“Bets have increased now that a rate cut will come in August, but financial markets are still not fully pricing in a rate cut until September.”

Nicholas Hyett, Investment Manager at Wealth Club: “There were lots of reasons for the Bank of England to sit on its hands this time round.

“Falling inflation has been driven by lower energy and food prices. As we start to lap the very high prices from last year, core inflation will become increasingly important, and service sector inflation in particular remains high at 5.7%.

“The net effect is that inflation will likely start to tick up again later this summer. Wage growth too remains high – over 2% in real terms – while the economy is expected to grow 0.5% in Q2.

“Put all that together with the potential for rate cuts to be seen as an election boon to a struggling government, and it’s no surprise Bailey and Co. have decided inaction is the best course of action.

“Long term, the potential for inflation to take off again later in the year means the market no longer expects the Bank to cut rates at all in 2024, where at the beginning of the year four cuts were being priced in. It’s amazing the difference six months can make.”