General view of the Bank of England building in London.
LONDON – The Bank of England announced its decision to keep interest rates stable at its June meeting, but described the choice as “finely balanced” after the UK reached its 2% inflation target.
Money market prices pointed to a near 50% chance of a rate cut in August as investors interpreted a subtly dovish message.
The central bank’s reference rate is 5.25%, the highest level in the last 16 years, maintained since August.
Seven members of the monetary policy committee voted to keep the rate unchanged, while two favored a 25 basis point cut, mirroring the outcome of the May meeting. One basis point represents one hundredth of a percentage point.
In its statement, the MPC stressed that inflation had reached the central bank’s target and cited weakening indicators for “near-term inflation expectations” and wage growth.
The OAG (Office for National Statistics) added that uncertainty surrounding estimates of labour market activity made it “very difficult to assess its evolution”.
Reiterating an earlier message that had raised speculation about potential easing, the Bank of England stressed the need for monetary policy to “remain tight for a sufficiently long period to sustainably return inflation to the 2% target”.
Inflation data on Wednesday showed headline price increases cooled to 2% in May, beating the target ahead of the US and the euro zone, even as the UK saw its steepest spike in inflation in two years.
However, economists noted that persistently high utility rates and underlying inflation in the UK imply the potential for continued upward pressure.
The central bank’s decision to keep rates unchanged comes just two weeks before the general election, while the state of the economy and proposals to revive sluggish growth represent major battlegrounds.
Governor Andrew Bailey stressed that the politically independent BOE will continue to focus on its own data, despite speculation that it may act more cautiously after the next election.
‘Finely balanced’
Attention has now shifted to the possibility of a rate cut in August. Money market prices indicated a nearly 50% chance of this following Thursday’s statement, higher than the previous day.
Among the seven members who voted in favour, the OAG noted disagreement regarding the level of accumulated evidence needed to justify a cut, making their decision “finely balanced”.
Some members believed that key indicators of the persistence of inflation «remain elevated», expressing concern about services, strong domestic demand and wage growth. Others, however, argued that higher-than-expected services inflation in May had not had a significant impact on the UK’s overall disinflationary trajectory.
Ruth Gregory, deputy chief UK economist at Capital Economics, said several developments pointed to an impending rate cut, including the “finely balanced” commentary and the fact that the BOE’s overall tone had not become as hawkish as expected.
James Smith, developed markets economist at ING, said the possibility of a summer rate cut is higher than the 30-40% previously expected by markets.
“I think the inflation numbers, the services inflation… I think the road is still open and I think they (the BoE) will remain reasonably confident,” Smith said in an interview.
He added: «A bit like the (European Central Bank), I think they have more confidence in their ability to forecast inflation than they did 6-12 months ago.»
While several central banks in Europe have already begun to ease monetary policy, including the ECB, the Swiss National Bank and the Swedish Riksbank, the US Federal Reserve, often seen as the leading central bank, has left traders unsure about the timing of its first rate cut. Market data suggests a 65% chance of a September cut in the US.
GBP’s losses extended against the US dollar, with the currency trading 0.3% lower at $1.267 at 1pm in London.
