- There was no surprise from the Bank of England at today’s meeting, which maintained the benchmark rate at a 16-year high of 5.25%.
- Ahead of the meeting, the markets had priced in a 95% chance that the BoE would hold rates.
- This marked the eighth straight meeting that the BoE has kept the benchmark rate unchanged, as policymakers remain hesitant to lower rates due to inflation concerns.
The vote by the Monetary Policy Committee (MPC) to hold rates was 7-2, with seven members voting to hold and two members supporting a rate cut of 25 basis points. This result was also expected by the markets and contributed to the British Pound’s muted response to the rate decision.
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The rate statement noted that although inflation has fallen to the 2% target, monetary policy will need to remain restrictive until inflation returns to the 2% target “sustainably”. In other words, the BoE was saying that it’s good news that inflation has dropped to 2% but it needs to see additional inflation reports before it is convinced that inflation will remain around 2%, even with a rate cut.
Services Inflation, UK Election Sink Rate Cut Hopes
The statement also expressed concern over services inflation, which is almost triple the 2% target. Services inflation dropped slightly from 5.9% to 5.7%, but this was higher than the market estimate of 5.5%. The BoE is unlikely to lower rates until this inflation component shows a substantial decline.
What the BoE statement left out was political considerations to its decision to hold rates. The BoE did not want to make any moves that could appear as meddling in the UK election, which will be held on July 4th. Had the central bank lowered rates today, the government would have claimed the credit, saying it proved that the government’s economic policy has been successful.
UK Prime Minister Sunak Rishi, who is likely to get crushed in the election, would have received a badly-needed boost from a rate cut. Unfortunately for Rishi, the BoE preferred to stay on the sidelines and doesn’t meet again until August, after the election.
British Pound Lower, UK Stock Market Rises Slightly
Today’s rate decision was a virtual certainty and hasn’t had a major effect on the financial markets.
The GBP/USD currency pair drifted ahead of the rate decision and declined 0.17% following the rate announcement. At the time of writing, GBP/USD is trading at 1.2681, down 0.30% on the day.
The FTSE 100 has posted slight gains today and is currently up 24.10 points (0.31%) at 7690.20.