Bank of England Holds Rates Steady Amid Speculation for Future Cuts

The Bank of England chose to maintain interest rates at its June meeting, deeming the decision as “finely balanced” following the achievement of the U.K.’s 2% inflation target. 

This led to an increase in the likelihood of an August rate cut to almost 50-50, as investors interpreted the communication from the bank as subtly dovish.

The central bank’s key rate remains at 5.25%, a level it has retained since August 2023, marking a 16-year high. While seven members of the Monetary Policy Committee voted in favor of holding rates, two members were in favor of a 25 basis points cut, mirroring the situation at the May meeting.

The MPC acknowledged that inflation had met the central bank’s target and highlighted that measures of “short-term inflation expectations” and wage growth had softened.

The Office for National Statistics reported on Wednesday that UK inflation dropped to the Bank of England’s target of 2.0% in May, marking the final release of this crucial economic indicator before the national elections in July. 

The headline figure decreased from 2.3% in April, aligning with the 2% forecast from economists surveyed by Reuters. Services inflation, particularly significant for the BOE due to its prominence in the UK economy and its representation of domestically-driven price increases, stood at 5.7% in May, down from 5.9% in the prior month. Core inflation, excluding energy, food, alcohol, and tobacco, declined to 3.5% from 3.9% in April.