UK interest rates at 16-year highest of 5.25%

Andrew Bailey, the Bank of England’s deputy governor, said that it was important to keep interest rates low in order to maintain a low inflation rate.

The monetary committee voted by 7-2 to freeze the base rate of 5.25 percent, which is a 16-year record. This vote pattern was unchanged from its previous May meeting. Analysts in the City had widely predicted this move, even though prices inflation has fallen to 2 percent.

Bailey, the Bank governor, was among the MPC members who backed the “hold” decision. They said the decision was “finely balanced”, while others stated that “further evidence of decreasing inflation persistence is needed before reducing monetary policy restrictions”.

Sir Dave Ramsden, Swati Dhingra and the other two members that voted in favor of a 0.25-point reduction, stated that an injection of demand was needed to keep the inflation rate at the Bank’s medium-term target.

Bailey said: “It is good news that the inflation rate has returned to 2 percent. We want to make sure inflation stays low, so we decided to keep rates at 5.25 percent for the time being.

Rob Wood, UK macroeconomics economist at Pantheon Macroeconomics said that the Bank, by describing this call as “finely balanced”, suggests three additional members may be ready to vote for a reduction at the MPC meeting next in August, giving a majority of votes to change the policy. The markets therefore see a cut in August as a foregone conclusion after these minutes.”

Peter Arnold, EY’s UK chief economist agreed that “successful significant overshoots of services inflation — one MPC’s main measures of inflation persistency — had eliminated any likelihood of rates being reduced today.” The focus of the discussion was on future rate cuts.

By reporting that June’s decision for some members was “finely balanced”, the MPC sent out a clear message that the August meeting is now live, and that rate cuts are on the table if the data published in the next six week is positive.

The markets responded positively, as the FTSE 100 extended its morning gains to 8,240 points. This is a 0.4% increase, led by a 2 percent rise amongst the major housebuilders. The pound fell slightly against the dollar as investors bet on an earlier rate cut.

This announcement comes after Office for National Statistics figures this week showed that had fallen to the Bank of England target for first time since July 2020.

The MPC likely decided to maintain rates despite the decline in a key measure that measures the underlying pressures on prices. The financial markets revised their expectations for the first rate cut in over four years from August to September after the ONS reported that services inflation was down from 5.9% to 5.7 percent in May.

The measure of services inflation can be used to determine the level of domestic pressures within an economy. The main drivers of services inflation are household demand and wage growth. These variables can be affected by monetary policies.

Members of the MPC who voted to keep rates at the current level said that higher services inflation did not “affect significantly the disinflationary path that the economy is on”. They added that this was mainly due to one-off factors, such as an increase in the minimum wage or indexing household bills.

Since several months, the Bank has stated that it would only begin to loosen monetary policy if new economic data confirmed that inflation, wage growth and service prices are easing. The Bank acknowledged that tight monetary policies were weighing down on the growth of the economy and labour market.

The MPC stated that it will assess the economic data before its next meeting, which is on August 1, and “keep under review how long the Bank rate should be kept at its current level”.

Bailey and the other members of the committee suspended their speeches and communications throughout the campaign for the general election. This denied them the opportunity to explain if they were moving toward voting to reduce borrowing costs. The committee stated that “the election was not relevant to the decision it made at this meeting”.

Rishi Sunak said that under his premiership the economy had stabilised, which laid the foundation for the Bank of England’s decision to lower interest rates. Labour has a 20-point average lead over the Conservatives going into the July 4 general election.

Investors grew more confident after the Bank’s May meeting that the Bank could lower interest rates for the first month since March 2020.

Bailey stated that the Bank could have to reduce borrowing costs “possibly even more than is currently priced in market rates”. Bailey, Huw Pil, the Bank’s Chief Economist, and Ben Broadbent – a deputy governor – were all among those who voted to keep rates unchanged. City watchers view the trio as an indicator of the MPC’s overall policy.

Broadbent will be leaving the MPC after 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.

The MPC raised its forecasts for the second quarter to 0.5 percent from 0.2 percent, based on the economic growth of 0.6 percentage points in the first three months, which was higher than expected.