The Bank of England is expected to keep interest rates unchanged at its meeting on Thursday, marking the seventh consecutive time rates have been held steady. This decision means the Bank Rate will remain at its highest level in 16 years, a measure aimed at controlling inflation and stabilising the economy. The Bank’s Monetary Policy Committee (MPC) has been closely monitoring economic indicators to guide their decisions on interest rates.
During their last meeting in May, the MPC hinted at a potential rate cut in June if economic conditions improved. However, recent data releases have shown persistent inflationary pressures, making it difficult for the Committee to justify a reduction in rates. The Bank Rate, which influences borrowing costs across the economy, has thus remained unchanged as the MPC aims to navigate the current economic challenges.
Ruth Gregory, deputy chief UK economist at Capital Economics, commented on the situation, noting that the Bank of England had emphasised that any decision to reduce the Bank Rate would be driven by economic data. She highlighted that the recent data has not been favourable, pointing to ongoing inflationary trends that complicate the prospect of easing monetary policy. “The BoE made it clear that the economic data will determine when it starts to reduce Bank Rate,” Gregory said. “And the tone of the incoming data since then has been disappointing.”
The persistence of high inflation rates, despite previous monetary measures, indicates underlying economic issues that the Bank of England must address. The decision to hold rates reflects a cautious approach to managing the economy amid uncertain conditions. With inflation remaining stubbornly high, the Bank faces a challenging balance between stimulating growth and controlling inflation, making the timing of any future rate cuts uncertain.
April’s inflation report indicated that services inflation, which the Bank of England views as a key indicator of domestic price pressures, declined less than anticipated. Currently, services inflation remains around 6%, significantly higher than the 2% target set by the Bank. This persistent high level of services inflation suggests that domestic factors continue to drive price increases in the economy, making it a critical metric for the Bank’s policy decisions.
In addition, the latest labour market data, released last week, highlighted continued wage pressures in the private sector, with wage growth running at 5.8%. This figure is notably high and contributes to the overall inflationary pressures in the economy. The robust wage growth reflects ongoing tightness in the labour market, where demand for workers remains strong, pushing up wages and adding to inflation.
These two measures—services inflation and private sector wage growth—are essential for understanding the broader inflationary trends within the economy. Both coming in above expectations indicates that inflationary pressures remain entrenched, complicating the Bank’s efforts to bring inflation down to its target. Policymakers rely on these metrics to gauge the underlying inflation dynamics and to inform their decisions on interest rates.
Given the current data, the Bank of England is unlikely to feel confident about cutting interest rates in the upcoming meeting. The persistence of high services inflation and strong wage growth suggests that inflationary pressures are not easing as quickly as hoped. Therefore, policymakers are expected to maintain a cautious stance, keeping interest rates steady to manage these ongoing inflationary challenges.
Most economists believe it is highly unlikely that the Bank of England will cut interest rates during an election campaign.
Making a decision to cut rates just weeks before polling day could drag the Bank into political discussions. Members of the Monetary Policy Committee (MPC) have also had to cancel their public speeches during the election campaign, which limits their ability to explain their policy decisions.
As a result, the Bank is expected to maintain its current position. Policymakers anticipate that the next move will be a rate cut, but the timing is uncertain.
Economists generally did not expect additional guidance beyond what was given in May. Analysts at Barclays predicted “little to no change in guidance from the MPC this month.”
Interest rates are set to remain at 5.25%. However, some commentators still expect the Bank might cut rates in August.
Much of this depends on the inflation data for May, which will be released just before the Bank’s meeting. Economists expect the headline inflation rate to fall to 2% for the first time since July 2021, and services inflation to decrease to around 5.5%.
In comparison, the European Central Bank cut interest rates for the first time in five years earlier this month, while the Federal Reserve decided to hold rates, citing only modest progress on inflation.
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