On Thursday, the Bank of England held its key interest rate at a 16-year high despite a slowdown in UK inflation, choosing not to reduce rates ahead of the general election next month.
Although annual inflation fell to a nearly three-year low of 2.0 percent in May, aligning with the central bank’s target, the BoE was expected to maintain the rate at 5.25 percent before the national vote on July 4.
“It’s positive news that inflation has returned to target,” said Bank of England governor Andrew Bailey after the regular policy meeting. “We need to ensure that inflation remains low, which is why we’ve decided to keep rates at 5.25 percent for now.”
Potential August Cut? Analysts suggest a strong possibility that the BoE might cut rates at its next meeting in August after a series of hikes that have helped reduce UK inflation from its highest level in over four decades.
The anticipation of a potential rate cut impacted the British pound, while London’s top-tier FTSE 100 stock index rose in early afternoon trading.
Shortly before the BoE’s latest announcement, the Swiss National Bank revealed a second consecutive interest rate cut, having been the first Western central bank to lower borrowing costs, which had been raised to combat inflation, in March. Norway also froze rates on Thursday.
Analysts widely expected no change in the BoE rate due to UK services inflation remaining well above two percent and with energy bills projected to rise later in the year.
Seven members of the bank’s Monetary Policy Committee (MPC) voted to keep the rate steady, while two members favored a cut, mirroring the outcome of the previous meeting in May.
The BoE noted that for some members who voted for no change, the decision was “finely balanced,” indicating they could be persuaded to support a rate cut in August, according to Susannah Streeter, head of money and markets at Hargreaves Lansdown.
“Bets have increased that a rate cut will occur in August, but financial markets are still not fully pricing in a rate cut until September,” she added.
‘Election Not Relevant’ Analysts also noted that the UK central bank would have aimed to avoid a decision on Thursday that might be perceived as politically biased during a high-profile election campaign.
However, the BoE emphasized that its decision was not influenced by politics.
The MPC “noted that the timing of the general election was not relevant to its decision,” according to the meeting minutes.
The BoE’s primary role is to maintain the UK annual inflation rate close to 2 percent.
