Bank of England to keep interest rates at 16 year high

Bank of England will likely leave interest rates unchanged for the seventh consecutive time at its Thursday meeting, despite the fact that inflation has returned to the UK official target for nearly three years.

At midday, the central bank will vote to keep the base rate unchanged at 5.25 percent, which is a record high for 16 years.

According to the Office for National Statistics’ figures, inflation fell to 2 percent last month, from 2.3 percent in April. Analysts believe that the Bank will not cut rates this month due to the resilient services inflation.

The May data showed that the rate of inflation had fallen below the Bank of England official target for first time since July 2020.

The average market forecast predicts that the Bank of England will lower its base rate at its meeting in September, with a small chance of an August cut. The traders believe that the rates will only fall twice this year. Each time, they expect a quarter-point increment. Six rate cuts had been priced in the market at the start of the year.

Investors are increasingly convinced that, following the Bank of England’s rate-setting committee’s meeting last month on monetary policy, the central bank will lower interest rates at its meering this month for the first since March 2020.

Andrew Bailey, Bank of England governor, stated that after the MPC’s decision to hold interest rates last month, it was likely we would need to reduce bank rates in the next quarters, and to make monetary policies less restrictive during the forecast period. This could be more than what is currently priced into the market rates.

The MPC policy statement was slightly tweaked, and these comments fueled speculation about a rate reduction.

The Bank has been saying for months that they will only start to loosen their monetary policy when new economic data confirms that inflation, wage increases and service prices have eased.

Several key statistics have exceeded expectations since the MPC last meeting. Most notably, services inflation has dropped from 5.9% in May to 5.7 percent compared with Bank’s forecasts of 5.3 percent.

BNP Paribas analysts, a French investment bank, stated: “At the May meeting, BoE moved in a more doveish direction. They suggested that if inflation indicators continue to follow its projections, it would cut rates in June.”

“We thought that earlier data surprises would have taken June off the table, and [the latest] data on inflation seals the deal.”

Bailey and the eight other members of the Committee have stopped speeches and communications throughout the general election campaign. This has denied them the opportunity to explain to City officials whether they intend to vote for a decrease in borrowing costs.

Prime Minister Rishi Sunak hailed recent fall in inflation as proof that the UK’s economy has normalised during his premiership.

The nine-member MPC last month voted 7-2 to keep the base rate at its 16-year-high. Dave Ramsden – the Bank’s deputy Governor for Markets and Banking – voted with Swati Dhingra – an external member – in favor of a 0.25-percentage-point reduction.

Bailey, Huw Pil, the Bank’s Chief Economist, and Ben Broadbent – deputy governor for monetary policies – all voted in favor of keeping rates unchanged. In the City, the trio is viewed as a barometer for the MPC’s overall policy position.

Broadbent will retire from the MPC after serving for more than 10 years. Clare Lombardelli will replace him as chief economist of the Organisation for Economic Co-operation and Development and former Treasury official.