Britain's central bank intends to maintain interest rates at a 16-year high of 5.25% on Thursday despite persistent underlying inflation pressures. This decision denies Prime Minister Rishi Sunak a much-needed economic boost ahead of the July 4 election. Early last month, Governor of the Bank of England Andrew Bailey expressed optimism about a potential rate cut, suggesting it could happen in June, though it was not assured.
While data released on Wednesday indicated that headline inflation returned to the Bank of England's 2% target in May for the first time in almost three years, outpacing both the US and euro area, the medium-term outlook remains less favorable.
Service price inflation declined less than anticipated, standing at 5.7% instead of the expected 5.3%, and private sector wage growth was nearly double the level considered consistent with 2% inflation by the Bank of England.
Last month, the central bank forecasted inflation to climb to approximately 2.6% by the year's end, given the diminishing impact of a recent reduction in regulated household energy costs. In a Reuters poll of 65 economists conducted last week, none anticipated a rate cut by the Bank of England in June. The most probable timeline for policy easing is now projected to start on August 1.
The expected voting pattern is likely to replicate the 7-2 split observed in May, with Deputy Governor for Markets and Banking Dave Ramsden and external Monetary Policy Committee member Swati Dhingra favoring a quarter-point rate cut.
Even as unemployment has risen to its highest level in two and a half years at 4.4%, economic growth this year has remained reasonably strong relative to recent British standards.
Financial markets express doubts about an August rate cut, assigning it a 30% probability, with a higher likelihood of the initial adjustment occurring in September. There is also a risk that any rate action could be postponed until November, akin to expectations for the US Federal Reserve.
In any scenario, a rate cut would likely come too late for Sunak, as his Conservative Party trails the opposition Labor Party by approximately 20 points in pre-election surveys.
While Sunak attributes the decline in inflation since assuming office in October 2022, when it peaked at an 11.1% high, the Labor Party attributes high mortgage rates to the economic mismanagement of former Conservative leader Liz Truss.
Since the onset of the election campaign, the Bank of England has maintained a low profile, canceling public engagements. Earlier, Bank of England Chief Economist Hugh Pill criticized the excessive focus on the June rate cut as misguided, but both he and Deputy Governor Ben Broadbent, who steps down at the end of this month, acknowledged the possibility of a rate cut during the summer.
The Bank of England initiated rate hikes in December 2021, preceding other major central banks, and reached its current peak in August 2023.
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