Source: Glonui.

At 19:00 on June 20th Beijing time, the Bank of England announced that it would continue to maintain its benchmark interest rate at 5.25%, a 16-year high, which is consistent with market expectations. This is also the seventh consecutive time that the Bank of England has kept interest rates unchanged.

Looking back, in August 2023, the Bank of England announced that it would raise its benchmark interest rate from 5% to 5.25%, which was the 14th consecutive interest rate hike since December 2021. Since then, the Bank of England has kept its benchmark interest rate at this level.

Although during the last meeting, Bank of England Governor Bailey expressed optimism about cutting interest rates and things were moving in the right direction. However, three weeks before this round of meetings, British Prime Minister Sunak announced parliamentary elections, which almost ruled out the possibility of the Bank of England announcing an interest rate cut in advance.

After the announcement, British government bond prices rose, with the two-year bond yield falling to 4.14%, the lowest level since March.

At the same time, traders have increased their bets on a Bank of England rate cut and are more inclined to cut interest rates for the first time in August. Overnight index swaps show that investors have raised their bets on the Bank of England's interest rate cuts in the coming months, with an 88% chance of an interest rate cut in September.

Overview of Bank of England rate decisions

Interest rate level: The Bank of England has kept its benchmark interest rate unchanged at 5.25% for the seventh consecutive time, which is in line with market expectations;
Voting results: 7 people voted to keep interest rates unchanged, and 2 people voted to support interest rate cuts. Deputy Governor Ramsden and Monetary Policy Committee member Silvana Tenreyro voted for rate cuts;
Interest rate outlook: The decision not to cut interest rates is "subtly balanced", and decision-makers are generally considered to be in favor of a rate cut;
Inflation prospects: Key indicators of inflation persistence continue to slow down, and it is expected that CPI will rise slightly to around 2.5% in the second half of the year;
Economic outlook: The forecast for GDP growth in the second quarter has been raised from 0.2% to 0.5%;

A seventh stand by decision

Despite background of successive interest rate cuts by the ECB, Swiss National Bank and UK’s inflation plummeted to 2%, the Bank of England still chose to "stand by".

According to the monetary policy summary, the Monetary Policy Committee passed this interest rate decision by a vote of 7 to 2, with only Deputy Governor Dave Ramsden and external Monetary Policy Committee member Silvana Tenreyro supporting a 0.25 percentage point reduction in interest rates to 5%.

The Bank of England stated that monetary policy needs to remain restrictive for a sufficient period of time until the risks of inflation rates being above the 2% target disappear.

The committee also recognizes that even if bank interest rates are lowered, the monetary policy stance may remain restrictive, as it starts from a level that is already restrictive.

Bank of England Governor Bailey pointed out in a statement that the latest inflation data showed that the inflation rate has returned to the 2% target, which is good news, but it is too early to cut interest rates now.

"We need to ensure that inflation will remain low, which is why we have decided to temporarily keep interest rates at 5.25%."

At the same time, the meeting minutes shows that seven members of the committee believe that the Bank's decision to keep interest rates at 5.25% is sensible.

They pointed out that the overall CPI inflation rate has fallen to the 2% target. The restrictive stance of monetary policy is putting pressure on real economic activity, causing labor market loosening and dragging on inflation pressures. The key indicator of persistent inflation continues to slow down, although it is still at a high level.

Two members lean toward cutting interest rates by 0.25 percentage point. For them, bank rates need to be lowered now to achieve a smooth and gradual transition to the policy stance while considering the lagging transmission.

For some time, CPI inflation has been steadily declining and returned to the 2% target in May. It is expected to remain close to 2% in the short term, consistent with further slack in the labor market, forward-looking indicators of inflation and pass-through, and a sustained decline in inflation expectations. Given the poor demand outlook, the risk of inflation remaining at the target level in the medium term is downward.

Is a rate cut coming soon?

On May 23, local time, Prime Minister Sunac announced that the general election will be held on July 4th this year, the first time in July since 1945 in the United Kingdom.

The latest inflation data show that the UK inflation rate in May dropped to 2%, reaching the target inflation level set by the Bank of England for the first time in nearly three years.

It is worth noting that in order to cope with high inflation, the Bank of England raised its benchmark interest rate to 5.25% in August last year and has since remained unchanged. It was also because of the soaring food and energy costs that the UK inflation rate soared to 11.1% in October 2022.

Zara Noakes, a global market analyst at JPMorgan Asset Management, pointed out that the inflation rate in the service industry reached 5.7%, lower than the 5.9% in April, but still overheated.

The market expects that service prices are still too high, which is one of the reasons why the Bank of England did not choose to cut interest rates.

The inflation news nailed the last nail for the hope of the Bank of England's interest rate cut in June... If the stickiness of domestic prices continues and economic activity continues to rebound, the interest rate cut in August is also unlikely to be implemented.

Ruth Gregory, deputy chief economist at Capital Economics UK, said that progress among Bank of England decision-makers suggests that a rate cut is becoming increasingly close after the central bank kept its key rate at 5.25%.

First, two interest rate setters voted again to cut the rate to 5.0%, and even for some members who hold an unchanged position, the decision to maintain rates is a "delicate balance." They believe that the recent rise in service industry inflation is affected by one-time effects.
Second, the new wording that "as part of the August forecast, the Committee will consider all available information and how it affects the assessment that the continued risk of sustained inflation is diminishing" should be understood as if the data develop as expected, the Bank of England is willing to cut interest rates in August.

Lindsay James, an investment strategist at Quilter Investors, believes that the Bank of England will closely monitor wage growth (which is still around 6%) and service industry inflation, which has been slowly declining and continues to exacerbate core inflation.

Given the Bank of England's hesitation on inflation issues, the central bank may cut interest rates after a while, which may be similar to the approach of the Fed, which is currently expected to cut interest rates only once this year.

Editor/Lambor