General view of the Bank of England building in London.
LONDON – The Bank of England announced its decision to keep interest rates steady at its June meeting, but described the move as “finely balanced” following the UK’s achievement of its 2% inflation target.
Money market prices pointed to a near 50% chance of a rate cut in August as investors interpreted a subtly dovish message.
The central bank’s key rate stands at 5.25%, its highest level in 16 years, and has been held since August.
Seven members of the monetary policy committee voted in favor of maintaining the rate, while two supported a 25 basis point cut, mirroring the outcome of the May meeting. One basis point represents one hundredth of a percentage point.
In its statement, the Monetary Policy Committee stressed that inflation had reached the central bank’s target and mentioned a softening of indicators related to “short-term inflation expectations” and wage growth.
The OAG (Office for National Statistics) added that uncertainty over estimates of labor market activity made it “very difficult to assess its evolution”.
Reiterating an earlier message that had sparked speculation about potential easing, the Bank of England stressed the need for monetary policy to “remain restrictive for a sufficiently long period to sustainably return inflation to the 2% objective”.
Inflation data on Wednesday showed consumer price growth cooled to 2% in May, beating the target ahead of the US and the euro zone, even as the UK saw its steepest spike in inflation in two years.
However, economists noted that persistently high utility rates and underlying inflation in the UK imply the potential for continued upward pressure.
The central bank’s decision to keep rates unchanged comes just two weeks before the general election, while the state of the economy and proposals to revive sluggish growth represent major battlegrounds.
Governor Andrew Bailey stressed that the politically independent BOE will continue to focus on its own data, despite speculation that it may be more cautious after the next election.
‘Well balanced’
Attention has now shifted to the possibility of a rate cut in August. Money market prices indicated a nearly 50% chance of this following Thursday’s statement, higher than the previous day.
Among the seven members who voted in favor, the MPC noted disagreement over the level of accumulated evidence needed to justify a cut, making their decision “finely balanced.”
Some members believe that key indicators of persistent inflation “remain elevated”, expressing concern about services, strong domestic demand and wage growth. Others, however, have argued that higher-than-expected services inflation in May had no significant impact on the UK’s overall disinflationary trajectory.
Ruth Gregory, deputy chief UK economist at Capital Economics, speculated that several developments point to an imminent rate cut, including the “finely balanced” commentary and the fact that the BOE’s overall tone has not become more hawkish as expected.
James Smith, developed markets economist at ING, said the chance of a summer rate cut was higher than the 30-40% that markets had previously expected.
“I think the inflation numbers, services inflation… I think the road is still open and I think (the BoE) will remain reasonably confident,” Smith said in an interview.
He further added: “A bit like the (European Central Bank), I think they have more confidence in their ability to predict inflation than they did 6-12 months ago.”
While several central banks in Europe have already begun to ease monetary policy, including the ECB, the Swiss National Bank and the Swedish Riksbank, the US Federal Reserve, often seen as the leading central bank, has left traders unsure about the timing of its first rate cut. Market data suggests a 65% chance of a September cut in the US.
The GBP’s losses extended against the US dollar, with the currency trading 0.3% lower at $1.267 by 1pm in London.
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