General view of the Bank of England building in London.
LONDON – The Bank of England announced its decision to keep interest rates stable at its June meeting, but described the choice as “finely balanced” following the UK reaching its inflation target of 2 %.
Money market prices pointed to a nearly 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 to keep the rate unchanged, while two favored 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 Office for National Statistics (OAG) added that uncertainty around 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 rises cooling to 2% in May, above target ahead of the US and eurozone, despite the UK seeing a sharper inflation spike in the past two years.
However, economists noted that persistently high services rates and core inflation in the UK implied the potential for continued upward pressure.
The central bank’s decision to keep rates unchanged comes just two weeks before a general election, with the state of the economy and proposals to revive sluggish growth being major battlegrounds.
Governor Andrew Bailey stressed that the politically independent BOE will remain focused on its own data, despite speculation that it may be more cautious after the upcoming vote.
'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 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, suggested that several developments point to a 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 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 started easing monetary policy, including the ECB, the Swiss National Bank and the Swedish Riksbank, the US Federal Reserve, often considered the leading central bank, has left traders uncertain about the timing of its first rate cut. Market data suggests a 65% chance of a September cut in the US.
GBP's losses extended against the US dollar: the currency fell 0.3% to $1.267 at 1pm in London.
