General view of the Bank of England building in London.
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LONDON – The Bank of England on Thursday chose to hold interest rates steady at its June meeting, but described the decision as “very balanced” after UK inflation reached its 2% target.
Money market pricing raised the probability of an interest rate cut in August to nearly 50-50 on what investors saw as dovish messages.
The central bank's key interest rate is at its highest level in 16 years at 5.25%, where it has remained steady since August.
Seven members of the Monetary Policy Committee voted in favor of stabilization, while two favored a rate cut of 25 basis points. The result reversed the vote at the May meeting. A basis point is equal to one-hundredth of a percentage point.
The Monetary Policy Committee indicated in a statement that inflation had reached the central bank's target and said that indicators of “short-term inflation expectations” and wage growth had declined.
The MPC added that it was “extremely difficult to measure the development of labor market activity” due to uncertainty over ONS estimates.
In a repeat of previous messages that some analysts thought could fall, the Bank of England again said monetary policy should “remain tight long enough to return inflation to the 2% target sustainably.”
Inflation data showed on Wednesday that the headline price rise fell to 2% in May, hitting the target ahead of the United States and the euro zone, despite the UK suffering from a sharp rise in inflation over the past two years.
However, economists said continued rise in UK services rates and core inflation indicated the potential for continued upward pressure.
The central bank's decision to hold the election comes just two weeks after a general election in which the state of the economy and proposals to restart sluggish growth emerged as key battlegrounds.
Despite speculation that the politically independent Bank of England may act more cautiously as a result of the upcoming vote, Governor Andrew Bailey stressed that it would remain focused on its own data.
“Finely balanced”
Attention will now turn to the prospects of a rate cut in August. Money market prices indicated a roughly 50% chance of this happening after Thursday's statement, higher than the previous day.
The MPC said that among the seven members who voted in favor of retention, there was disagreement over the level of accumulated evidence that would be required to justify a cut, and so their decision was “finely balanced.”
Some believe that key indicators of continued inflation “remained elevated,” with particular attention to services, strong domestic demand, and wage growth. However, others felt that hotter than expected services inflation in May did not significantly impact the overall path of UK disinflation.
Ruth Gregory, deputy chief UK economist at Capital Economics, said in a note that “several developments imply that a rate cut is approaching,” including the “finely balanced” commentary and the fact that the Bank of England’s overall tone has not become more hawkish than it has been. It was like it used to be. Previous Month.
The chance of a summer rate cut is higher than the 30% to 40% that markets were previously pricing in, according to James Smith, developed markets economist at ING.
“I think the inflation numbers and services inflation…I think the way is still paved for that, and I think they (the Bank of England) will remain reasonably confident,” Smith told CNBC's Silvia Amaro after Thursday's announcement.
“As with the (European Central Bank), I think they have more confidence in their ability to forecast inflation than they did maybe six to 12 months ago,” Smith said.
Other central banks in Europe have already begun to ease monetary policy, including the European Central Bank, the Swiss National Bank and the Riksbank, as they seek to revitalize economic growth.
This is despite the US Federal Reserve, which is often seen as the central bank leader due to the US's outsized influence on the global economy, has left traders pondering the date of the first interest rate cut. Money market pricing indicates a 65% probability of a September interest rate cut in the US, according to LSEG data.
the British pound It extended its losses against the US dollar, trading 0.3% lower at $1,267 at 1pm in London.
