Bank of England leaves rates on hold

The Bank of England left interest rates on hold on Thursday, as widely expected, despite falling inflation.

The Monetary Policy Committee voted by a majority of seven to two to keep the cost of borrowing at a sixteen year-high of 5.25%.

Data on Wednesday showed inflation had fallen back to the BoE’s 2% target for the first time in three years.

However, core inflation – which strips out more volatile elements such as food and energy – remains well above target, at 3.5%. Services inflation is also stubbornly high, at 5.7%.

Most analysts also did not expect the MPC to move ahead of next month’s general election.

Opinion is split, however, over whether the MPC will cut rates later this summer or hold off until early autumn.

Of the nine-person committee, external member Swati Dhingra and deputy governor Dave Ramsden voted for a 0.25 percent point reduction, to 5%.

Governor Andrew Bailey was among members who voted for no change.

The meeting’s accompanying minutes revealed there was a “range of views” among those who voted in favour of no change, however, with the decision “finally balanced”.

Bailey said: “It’s good news that inflation has returned to our 2% target. We need to be sure that inflation will stay low and that’s why we’ve decided to hold rates at 5.25% for now.”

The BoE said while indicators of short-term inflation expectations had continue to moderate, consumer price index inflation was expected to rise “slightly” in the second half, as last year’s decline in energy prices falls out of the annual comparison.

It does, however, now expect GDP growth of 0.5% in the second quarter, up from the 0.2% it predicated in May.

Alpesh Paleja, interim deputy chief economist at the Confederation of British Industry, said: “We still expect the MPC to cut rates in August, but this is not a done deal. They remain very data-driven, so the evolution of key indicators over the coming month will be key.

“Furthermore, the pace of any rate cuts beyond August is likely to gradual, if the BoE remained concerned about the persistence of underlying price pressures.”

Peter Arnold, UK chief economist at EY, said: “By reporting that, for some members, June’s decision was finely balanced, the MPC sent a clear signal that August’s meeting is live, and that a rate cut is on the cards if data published over the next six weeks is supportive.

“The EY Item Club forecasts that Bank Rate will be cut by 25 basis points in August, and another 25 basis points in November, meaning it ends this year at 4.75%.”

Laura Suter, director of personal finance at AJ Bell, said: “The BoE has taken a vow of silence during the general election campaign, meaning that if it did cut interest rates, it wouldn’t have been able to explain that decision. Without the ability to explain [its] thinking, it made sense for the bank to hold.

“The other elephant in the room is the outcome of the election. Whoever makes it into Number 10 will be changing policy, taxes and the fortunes of the UK economy, all of which play into the economic data the BoE scrutinises every month. The MPC will likely want to examine any plans and the impact of inflation and other data before it makes the move to cut rates.”

Central banks around the world have hiked rates in recent years, as they looked to tackle surging inflation.

But with inflation now well off peaks, most are now looking to cut the cost of borrowing. The European Central Bank reduced rates by 25 basis points to 3.75% earlier this month, for the first time in five years.

However, it is not thought it will cut again until the autumn.