General view of the Bank of England building in London.
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LONDON – The Bank of England opted to keep interest rates stable at its June meeting on Thursday, but described the decision as “very balanced” after British inflation hit its 2% target.
Markets increased their bets on a rate cut in August to almost 50-50, which was seen as a subtly dovish message by investors.
It keeps the central bank’s key interest rate at a 16-year high of 5.25%, where it has been held since August 2023.
Seven members of the Monetary Policy Committee voted to maintain the interest rate, while two voted for a 25 basis point cut, the same as at the May meeting.
In a statement, the MPC noted that inflation had reached the central bank’s target and that indicators of “near-term inflation expectations” and wage growth had weakened.
It is “very difficult to assess the evolution of labor market activity” because the Office for National Statistics estimates are uncertain, the MPC added.
Reiterating earlier reports that some analysts had expected a decline, it again said monetary policy must remain restrictive “for a sufficiently long period to sustainably bring inflation back to the 2 percent target.”
Inflation data on Wednesday showed that overall price increases cooled to 2% in May, hitting the target ahead of the United States and the euro zone, although the United Kingdom has seen a sharper rise in inflation over the past two years.
However, economists say continued high service rates and core inflation in the UK suggest the possibility of continued upward pressure.
The central bank’s decision to hold it comes just two weeks before general elections, in which the state of the economy and proposals to revive sluggish growth have emerged as a key battleground.
Despite speculation that the politically independent BOE might act more cautiously because of the upcoming vote, Governor Andrew Bailey had stressed that it would remain focused on its own data.
“Finely balanced”
Attention will now turn to the prospects of a rate cut in August. According to Thursday’s statement, money market prices indicated that the probability of this happening was almost 50%, higher than the previous day.
The MPC said there was disagreement among the seven members who voted to retain it about the level of evidence gathered needed to justify a cut and that their decision was “balanced”.
Some believed that key indicators of inflation resilience “remain elevated”, with particular concerns about second-round effects from services, strong domestic demand and wage growth. However, others felt that higher-than-expected inflation in services in May had not had a significant impact on the overall path of inflation in the UK.
Ruth Gregory, deputy chief UK economist at Capital Economics, said in a note that “several developments suggested a rate cut is getting closer,” including the “balanced” commentary and the fact that the BOE’s overall tone has not become more hawkish since then be May.
According to James Smith, developed markets economist at ING, the likelihood of a rate cut in the summer is higher than the 30-40% previously priced in by markets.
“I think the inflation numbers, the services inflation… I think the path to that is still bad, and I think they will be.” [the BoE] “I remain reasonably confident,” Smith told CNBC’s Silvia Amaro after Thursday’s announcement.
“A little like that [European Central Bank]I think they have more confidence in their ability to forecast inflation than they did perhaps six to 12 months ago.”
Other central banks in Europe have already begun easing monetary policy, including the European Central Bank, the Swiss National Bank and the Swedish Riksbank, in a bid to restart economic growth.
That’s even as the Federal Reserve, sometimes seen as the leading central bank because of the U.S.’s outsized influence on the global economy, has traders wondering when its first rate cut will come. Money market prices suggest a 65% chance of a cut in September, according to LSEG data.
The British pound Losses against the U.S. dollar extended 0.3% lower at $1.267 at 1 p.m. in London.
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2024-06-20 12:05:14
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