Instant view: Bank of England holds rates steady ahead of UK election

LONDON (Reuters) – The Bank of England kept interest rates steady at a 16-year high of 5.25% on Thursday ahead of a July 4 election, but some policymakers said their decision not to cut rates was now “finely balanced”.

The BoE’s Monetary Policy Committee voted 7-2 to keep rates on hold, in line with economists’ expectations in a Reuters poll. Deputy Governor Dave Ramsden and external MPC member Swati Dhingra remained the only policymakers to support a cut to 5%.

MARKET REACTION:

FOREX: Sterling dipped after the decision.

It was last down 0.24% on the day at $1.2689 compared to $1.2706 earlier and traded at 84.56 pence per euro, a touch softer on the day.

STOCKS: The blue-chip FTSE 100 rallied and was last up 0.38%. The mid-cap FTSE 250, which is more exposed to the domestic British economy, was also up around the same amount having been 0.16% higher just before the rate decision.

FIXED INCOME: Benchmark 10-year gilt yields fell and were last down 3.4 basis points on the day at 4.036%, having traded around 4.07% earlier.

Money markets showed traders were pricing in 50 bps worth of cuts by end-2024, compared with 45 bps’ worth prior to the decision.

COMMENTS:

JULIAN HOWARD, CHIEF MULTI-ASSET INVESTMENT STRATEGIST, GAM, LONDON:

“The Bank of England left interest rates unchanged today at 5.25%, but the path appears increasingly clear for some easing at the August meeting.

Inflation has come right down to the target level of 2%, unlike in the US and – to an extent – Europe. In particular, the UK’s energy bills are easing and although its unique bill-capping regime has seen lumpier price movements, actual realised prices for consumers are finally normalising.”

FRANCES HAQUE, UK CHIEF ECONOMIST, SANTANDER, LONDON:

“There were no surprises today with the Monetary Policy Committee (MPC) keeping Bank Rate at 5.25% with a vote of 7-2 for a hold the same as May’s vote.

With the general election in full swing and with services inflation proving sticky yet again only falling 0.2% in May, it was unlikely that the MPC would cut rates at this meeting, despite CPI falling to target.

Although April saw stagnation in growth, which was impacted by the very wet weather that month, the outlook remains positive, with the Purchasing Managers Index (PMIs) indicating further growth for Q2.

But any cuts to bank rate will continue to depend on how wage growth and services inflation evolve. The May PMIs have offered some light here, with both the input and output services price balance falling back, suggesting that price rises are slowing and that the boost from April’s minimum wage was a one-off. However, this needs to flow through to the official data.”

NEIL JONES, SENIOR FX SALES TO FINANCIAL INSTITUTIONS, TJM EUROPE, LONDON:

“A 7-2 hold vote is no surprise, but this is clearly a dovish hold. The narrative from Bailey suggests for some, they are close to cutting.”

“The pound is trading lower on the ‘finely balanced’ comment.”

“August is now down to the wire. A 5-4 cut vote is back in play.”

MICHAEL BROWN, SENIOR RESEARCH STRATEGIST, PEPPERSTONE, LONDON:

“The Bank of England’s Monetary Policy Committee sprang no surprises with today’s decision to hold Bank Rate steady for the seventh straight meeting, with such a decision having been fully discounted by money markets prior to its announcement.

“The unchanged split 7-2 vote, with (Swati) Dhingra and (Dave) Ramsden again favouring an immediate 25-bp rate cut, also came as little surprise, with information since the May meeting having given policymakers little reason to significantly alter their stance over the last six weeks.

“Reflecting this, the accompanying policy statement – unsurprisingly – was largely a ‘carbon copy’ of that released after the aforementioned May meeting. It was, however, noteworthy that the decision not to cut was described as “finely balanced” for some members of the Committee, heightening the chances of a cut next time around.”

ANDREW SUMMERS, CHIEF INVESTMENT OFFICER AT OMNIS INVESTMENTS, LONDON:

“We didn’t expect the Bank to reduce interest rates today.”

“This year’s upside surprises to inflation have been too many and yesterday’s print probably marks the low for this year, so the Bank will want to see further evidence that inflation has indeed been tamed. This is likely to come in the form of temperance in service sector and wage inflation, which we do expect will begin to emerge soon. Rate cuts are on the horizon, beginning possibly in August but probably by November.”

LINDSAY JAMES, INVESTMENT STRATEGIST, QUILTER INVESTORS, LONDON:

“Though inflation hitting 2% marked a significant milestone, it is simply not enough to allow the Bank of England to declare ‘job done’. This decision is no real surprise given month-on-month figures suggest inflation is unlikely to remain at 2% for long. It is, instead, expected to rise again later this year and ultimately settle between 2% and 3%.”