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 reference rate is 5.25%, the highest level in the last 16 years, maintained 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 MPC stressed that inflation had reached the central bank’s target and mentioned weakening indicators for «short-term inflation expectations» and wage growth.
The Office for National Statistics (OAG) 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 rises cooling to 2% in May, above target ahead of the US and euro zone, despite the UK seeing a sharper inflation spike in the past two years.
However, economists have noted that persistently high services rates and core 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 remain focused on its own data, despite speculation that it may act with more caution after the upcoming vote.
‘Well balanced’
Attention has now shifted to the possibility of a rate cut in August. Money market prices were pointing to a nearly 50% probability of this after 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 said key indicators of inflation persistence “remain elevated,” citing concerns 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 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 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 started 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 uncertain about the timing of the his first loosening. 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 falling 0.3% to $1.267 by 1pm in London.
