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Friday, June 21, 2024

Bank of England holds steady on rates despite election looming

The BoE has emphasized that its decision was not influenced by the impending general election, despite the potential political ramifications.

On Thursday, the Bank of England (BoE) opted to maintain its key interest rate at a 16-year high of 5.25%, despite a significant slowdown in UK inflation. This decision comes just weeks before Britain’s general election, scheduled for July 4. The annual inflation rate slowed in May to a near three-year low of 2.0%, aligning with the BoE’s target. Despite this, the central bank has decided against a rate cut at this juncture.

BoE Governor Andrew Bailey remarked, “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.”

Market Reactions and Speculations

The BoE’s decision has influenced financial markets, with the British pound experiencing downward pressure while the FTSE 100 index saw gains in early afternoon trading. Analysts predict a potential rate cut in August, following the pattern of previous hikes aimed at curbing inflation. Susannah Streeter, head of money and markets at Hargreaves Lansdown, noted, “Bets have increased now that a rate cut will come in August, but financial markets are still not fully pricing in a rate cut until September.”

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The BoE’s Monetary Policy Committee (MPC) had a split vote, with seven members supporting the decision to hold rates steady and two advocating for a cut. This was the same outcome as the previous meeting in May, indicating that some members’ decisions were “finely balanced,” suggesting they could be swayed in future meetings.

Global Central Bank Trends

The BoE’s decision stands in contrast to actions taken by other central banks. On the same day, the Swiss National Bank announced its second consecutive interest rate cut. In March, it became the first Western central bank to reduce borrowing costs, having previously raised them to combat inflation. Norway also decided to freeze its rates on Thursday.

Political Implications

The BoE has emphasized that its decision was not influenced by the impending general election, despite the potential political ramifications. The MPC’s minutes noted that the timing of the election was “not relevant to its decision.” Nonetheless, the decision is likely to disappoint the governing Conservative Party. A rate cut could have been seen as favorable economic news for Prime Minister Rishi Sunak’s campaign, potentially lowering mortgage rates and boosting household confidence.

Economic Outlook

Economists believe a rate cut is imminent, either at the BoE’s next policy meeting in August or the following one in September. Sanjay Raja, chief UK economist at Deutsche Bank, stated, “We continue to think that the MPC will start dialing down restrictive policy from summer and deliver two rate cuts this year.”

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The UK economy has struggled with stagnant growth, barely expanding since the pandemic rebound. Critics argue that the BoE’s cautious approach to inflation could unnecessarily impede economic growth. Suren Thiru, economics director at the Institute of Chartered Accountants in England and Wales, commented, “Given that the UK has moved onto a milder inflationary trajectory, rate setters remain too circumspect over the likelihood of loosening policy, risking unnecessarily impeding the UK’s growth prospects.”