Bank of England holds rates but August cut still on the table
The Bank of England voted to leave interest rates on hold for the seventh consecutive meeting in June, but an August rate cut is still on the cards.
Seven members of the Monetary Policy Committee (MPC) voted to leave the Bank Rate at 5.25 per cent, while the remaining two backed a 25 basis point cut. This was unchanged on May.
The decision came just a day after new figures showed that inflation fell to two per cent in May, its lowest level since July 2021 and down from peaks of over 11 per cent in October 2022.
“Its good news that inflation has returned to our two per cent target,” Andrew Bailey, governor of the Bank said.
However, he cautioned that “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”.
Policymakers are still concerned by the persistence of domestic inflationary pressures which could make it more difficult for inflation to remain at two per cent sustainably.
The Bank has singled out services inflation as a good gauge of domestic price pressures and yesterday’s figures showed that services inflation only fell to 5.7 per cent in May.
In its latest round of economic forecasts, produced in May, the Bank projected that services inflation would have fallen to 5.3 per cent by now.
Wage growth, which is a major contributor to services inflation, has also remained above expectations.
The minutes showed that the seven members who had backed a hold were significantly divided on the importance of stubborn services inflation.
Some MPC members who backed a hold were concerned that services inflation would “maintain persistent upward pressure” on underlying inflation. Others, however, thought that the recent upside surprises on services inflation “did not significantly alter the disinflationary trajectory that the economy was on”.
The more dovish members noted that some of the strength in services inflation over the past couple of months reflected ‘regulated’ components which change prices annually, such as mobile phone bills and broadband contracts.
They also pointed out that April’s near 10 per cent increase in the Minimum Wage, which likely pushed up services inflation in April and May, was “unlikely to be as large in future”.
For these members, June’s decision was “finely balanced”. This suggests some MPC members who backed a hold are edging towards a vote for rate cuts.
Many economists still think that the Bank could cut rates in August despite signs of persistent inflation. The minutes stressed that MPC members will “consider all of the information available” next time around.
The Bank expects to see a slight uptick in inflation towards the end of the year.
In May, the Bank forecast that the headline rate would rise to 2.6 per cent at the end of this year, before finally returning sustainably to the two per cent target in early 2026.
While the incoming data may have stayed the Bank’s hand, markets thought that the Bank was always unlikely to cut rates during an election campaign.
Policymakers have been unable to make public speeches during the campaign. These speeches could have prepared the ground for a rate cut or helped explain the decision after it was made.
The European Central Bank cut interest rates for the first time in five years earlier this month but the Fed held rates, citing only “modest” progress on inflation.