The Bank of England has, unsurprisingly, held interest rates at 5.25 per cent for the seventh time in a row. Markets downgraded their expectations for a June rate cut some time ago. Once Rishi Sunak called a general election in late May, the prospect of an early summer rate cut became even more unrealistic.
The Monetary Policy Committee notes in its minutes that ‘the timing of the general election on 4 July was not relevant to its decision at this meeting’. Instead, its decision was based solely on ‘what was judged necessary to achieve the 2 per cent inflation target sustainably in the medium term’. Central banks never want to be accused of playing politics, especially so close to an election. That means they tend to opt for the status quo: in this case, keeping the base rate unchanged.
Today’s minutes reveal that the voting breakdown was the same as in May: members voted 7-2 to maintain the interest rate, with the minority arguing to reduce the base rate by 0.25 percentage points. The Bank fears any kind of rise in inflation, having originally called the crisis so wrong.
That’s why the return of inflation to the 2 per cent target last month was ‘welcome’ news for some members of the Monetary Policy Committee, but ‘not necessarily indicative of the required sustained return to target.’ The Bank expects the inflation rate to pick up pace in the second half of the year, rising to 2.5 per cent, as lower energy prices fall out of the data. It’s nothing like the rises we’ve seen over the past few years, and medium-term projections suggest that inflation will go back down: 1.9 per cent in two years’ time and 1.6 per cent in three years’ time. But stubborn services inflation still has the Bank on fairly high alert, as the slowdown to 5.7 per cent in May was still higher than expected.
Still, the Bank has once again left the door open to rate cuts, and markets are still expecting them to start falling before autumn. The numbers are moving in the right direction and the MPC is preparing for a slow and steady rate-cutting process.
However, there’s a growing feeling that rates can’t come down soon enough. Higher interest rates are stifling the economy. The Bank forecasts that the economy will grow by 0.2 per cent in the second quarter of the year. The latest set of growth figures, showing stagnation in April, is also evidence of that.
Once the economy starts growing again, the party in charge of the country is likely to get some credit – despite such decisions being out of their control. It’s another trade-off Sunak made when he called an early election: forgoing the opportunity to see rates cut once (if not twice) before election day.
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