The Bank of England on Thursday kept its key interest rate at a 16-year high despite slowing UK inflation, opting against a cut before Britain’s general election next month.
While annual inflation slowed in May to a near three-year low of 2.0 percent, matching the central bank’s target, the BoE had been expected to keep the rate at 5.25 percent ahead of the national vote on July 4.
“It’s good news that inflation has returned to… target,” Bank of England governor Andrew Bailey said following the regular policy meeting.
“We need to be sure that inflation will stay low and that’s why we’ve decided to hold rates at 5.25 percent for now.”
– August cut? –
Analysts said there was strong chance that the BoE would cut at its next meeting in August following a series of hikes that have help bring down UK inflation from the highest level in more than four decades.
Prospects of a looming decrease weighed on the British pound, while London’s top-tier FTSE 100 stocks index rose in early afternoon trading.
Shortly before the latest BoE announcement, the Swiss National Bank unveiled a second straight interest-rate cut, after becoming in March the first Western central bank to slash borrowing costs that had been raised to battle inflation. Norway froze rates Thursday.
Analysts had widely expected no change to the BoE rate owing to UK services inflation remaining well above two percent and with energy bills set to rise towards the end of the year.
Seven members of the bank’s Monetary Policy Committee (MPC) voted to hold the rate steady, while two wanted a cut — the same outcome as the last meeting in May.
The BoE noted that for some members who voted for no change this time around, the decision was “finely balanced”.
This indicated “that they could be swayed in August”, noted Susannah Streeter, head of money and markets at Hargreaves Lansdown.
“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,” she added.
– ‘Election not relevant’ –
Analysts added that the UK central bank would have wanted to avoid a decision Thursday that could have been perceived as taking sides during a high-profile election campaign.
However, the BoE stressed that its announcement was in no way influenced by politics.
The MPC “noted that the timing of the general election… was not relevant to its decision”, said minutes of the meeting.
The BoE’s main role is to keep the UK annual inflation rate close to two percent.
Having hit the target last month, according to official data Wednesday, analysts argued that the news had handed a much-needed boost to embattled Prime Minister Rishi Sunak.
They added, however, that the inflation slowdown was unlikely to prevent his Conservatives from losing the election to the main opposition Labour party.
Holding the interest-rate steady was viewed as dealing another blow to Sunak’s faltering campaign.
Keir Starmer’s Labour has consistently led the Conservatives by around 20 points in opinion polls for nearly two years.
Elevated interest rates have worsened a UK cost-of-living squeeze because they increase borrowing repayments, thereby cutting disposable incomes and crimping economic activity.
The BoE began a series of rate hikes in late 2021 to combat inflation, which rose after countries emerged from Covid lockdowns and accelerated after the invasion of Ukraine by key oil and gas producer Russia.
UK annual inflation peaked at 11.1 percent in October 2022 — the highest level in 41 years — weighing on Britain’s economy.
Gross domestic product stagnated in April after the country exited recession in the first quarter of the year, as businesses and households weathered the cost-of-living crunch.
BoE policy on rates mirrors that of the US Federal Reserve, which says it is not yet ready to cut. It contrasts, however, with the European Central Bank, which has started to reduce borrowing costs.
