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 had been pointing to a roughly 50% chance of a rate cut in August, as investors had interpreted a subtly dovish message.
The central bank’s key interest rate stands at 5.25%, its highest level in 16 years, held since August.
Seven members of the monetary policy committee voted to keep the rate unchanged, while two supported a 25 basis point cut, mirroring the outcome of the May meeting. A 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 «near-term inflation expectations» and wage growth.
The OAG (Office for National Statistics) added that uncertainty surrounding estimates of labour market activity made it “very difficult to assess its evolution”.
Reiterating an earlier message that had raised 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% target”.
Inflation data on Wednesday showed headline price increases 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 hold rates comes just two weeks before a general election, with the state of the economy and proposals to revive sluggish growth being key battlegrounds.
Governor Andrew Bailey stressed that the politically independent BOE will continue to focus on its own data, despite speculation that it may act more cautiously 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 after Thursday’s statement, higher than the previous day.
Among the seven members who voted in favour, the OAG noted disagreement regarding the level of accumulated evidence needed to justify a cut, making their decision “finely balanced”.
Some members believed that key indicators of the persistence of inflation «remain elevated», expressing concern about services, strong domestic demand and wage growth. Others, however, argued that higher-than-expected services inflation in May had not had a 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 possibility of an interest rate cut in the summer was higher than the 30-40% previously expected by markets.
“I think the inflation numbers, the services inflation… I think the road is still open and I think they (the BoE) will remain reasonably confident,” Smith said in an interview.
He added: «A bit like the (European Central Bank), I think they have more confidence in their ability to forecast 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 main central bank, has left traders unsure about the timing of its first easing rate cut. Market data suggests a 65% chance of a September cut in the US.
GBP’s losses extended against the US dollar, with the currency trading 0.3% lower at $1.267 at 1pm in London.
