The UK’s Bank of England kept interest rates at their 20-year high despite inflation finally reaching its target.
The Bank of England maintained interest rates at their current levels at their Thursday meeting. The monetary decision was in line with expectations by Reuters-polled analysts.
Interest rates remain at their 20-year high of 5.25%. The BoE hiked rates in 11 consecutive meetings to battle rampant inflation, which reached its peak in late 2022 at 11.1%. At the time, the United Kingdom had one of the highest inflation rates measured in advanced economies.
The BoE’s policy has certainly been a success: inflation in the UK reached 2% in May, in line with the central bank’s target. The UK’s closest peers, the European Union and the United States reported inflation at 2.6% and 3.3% respectively in May.
However, that came at the cost of almost tanking the British economy to the ground. The UK almost fell into a recession in early 2024, and even the best forecast predicts only a mild stagnation for this year.
The committee voted 7-2 in favor of keeping rates stable. BoE Governor Andrew Bailey said the upcoming national elections on July 4th had no impact on the decision. Three members reportedly called this a “finely balanced” approach.
Summer cuts
According to the meeting’s minutes, the Bank of England is paving the way for one rate cut at their next conference on August 1st.
Inflation finally reached the target and the economy is in shambles, meaning this is probably the right moment to start cutting rates.
At the same time, the BoE wanted to remain cautious during this meeting as some sectors still show sky-high inflation. In particular, May services inflation came in at 5.7%, only a 0.2% fall from April. “Services CPI around the 6% mark continues to look inconsistent with being confident that you are going to sustainably hit a 2% inflation target, in my view,” Melanie Baker, senior economist at Royal London Asset Management, said in a note.
“On that basis, the committee will keep under review for how long [the] bank rate should be maintained at its current level,” Thursday’s minutes said.
If the BoE approves an August cut, it would be the third major central bank to start cutting rates during this inflationary cycle. The Swiss Central Bank came first, soon followed by the European Central Bank in June.
After the BoE cuts rates, pressure will mount on the American Federal Reserve, which is expected to start pivoting in November. If the gap between American and European (UK included) interest rates widens too much, exports between these continents will suffer significantly.
