LONDON: The Bank of England on Thursday kept its key interest rate at a 16-year high despite slowing UK inflation, opting against a cut before Britain’s general election next month.

While annual inflation slowed in May to a near three-year low of 2.0 per cent, matching the central bank’s target, the BoE had been expected to keep the rate at 5.25 per cent ahead of the national vote on July 4.

“It’s good news that inflation has returned to […] target,” Bank of England governor Andrew Bailey said following the regular policy meeting.

“We need to be sure that inflation will stay low and that’s why we’ve decided to hold rates at 5.25pc for now.”

August cut?

Analysts said there was a strong chance that the BoE would cut at its next meeting in August following a series of hikes that have helped bring down UK inflation from the highest level in more than four decades.

Prospects of a looming decrease weighed on the British pound, while London’s top-tier FTSE 100 stocks index rose in early afternoon trading.

Shortly before the latest BoE announcement, the Swiss National Bank unveiled a second straight interest-rate cut, after becoming March the first Western central bank to slash borrowing costs that had been raised to battle inflation. Norway froze rates Thursday.

Analysts had widely expected no change to the BoE rate owing to UK services inflation remaining well above two per cent and with energy bills set to rise towards the end of the year.

Seven members of the bank’s Monetary Policy Committee (MPC) voted to hold the rate steady, while two wanted a cut — the same outcome as the last meeting in May.

The BoE noted that for some members who voted for no change this time around, the decision was “finely balanced”.

This indicated “that they could be swayed in August”, noted Susannah Streeter, head of money and markets at Hargreaves Lansdown.

“Bets have increased now that a rate cut will come in August, but financial markets are still not fully pricing in a rate cut until September,” she added.

‘Election not relevant’

Analysts added that the UK central bank would have wanted to avoid a decision Thursday that could have been perceived as taking sides during a high-profile election campaign.

However, the BoE stressed that its announcement was in no way influenced by politics.

The MPC “noted that the timing of the general election… was not relevant to its decision”, said minutes of the meeting.

The BoE’s main role is to keep the UK annual inflation rate close to 2pc.

Published in Dawn, June 21st, 2024