Bank Rate Held At 5.25% Despite Inflation Hitting Target – Forbes Advisor UK

20 June: Market Eyes August For Possible Cut To 5%

The Bank of England has kept borrowing costs at a 16-year high of 5.25%, the seventh occasion since August last year that it has left the Bank Rate unchanged, writes Andrew Michael.

Today’s announcement saw the Bank’s Monetary Policy Committee (MPC) decide by seven votes to two to maintain the Bank Rate at its present level. The two dissenting votes were each in favour of a quarter of a percentage point rate reduction.

The Bank’s announcement echoes a recent decision by the US Federal Reserve, which also continued to keep borrowing costs on hold.

Explaining today’s decision, Sir Andrew Bailey, Bank of England governor, said: “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.”

The MPC said it would “continue to monitor closely indications of persistent inflationary pressures and resilience in the economy as whole, including a range of measures of the underlying tightness of labour market conditions, wage growth and services price inflation”.

The next Bank Rate announcement is due on 1 August, when the belief is that it may fall to 5%, although there are suggestions the Bank might wait to see if there is any economic fall-out from the General Election on 4 July.

The Bank of England, the Fed and the European Central Bank (ECB), along with a number of other leading central banks, are required to keep inflation at 2% over the long term.

In response to soaring inflation levels that beset the UK during 2022 and 2023, the Bank raised borrowing costs 14 times in a prolonged sequence of interest rate tightening.

The strategy has proved successful, with UK inflation dropping from a high of 11.1% in October 2022 to yesterday’s official figures that showed the Bank reached its 2% target in the year to May.

Today’s announcement means that millions of borrowers on variable rate and tracker mortgages and loans should not experience any direct impact on their repayments. Lenders, however, can alter variable rate products as they see fit.

However, the decision to maintain borrowing costs puts the Bank of England at odds with both the European ECB and the Swiss National Bank (SNB), which have each reduced their respective headline rates of interest in recent weeks.

Earlier today, the SNB reduced borrowing costs by a quarter of a percentage point, to 1.25%, having also delivered a surprise rate cut of the same amount in March.

Earlier this month, the ECB announced a first interest rate cut since 2019 for the eurozone economic bloc, where rates now stand in a range between 3.75% and 4.25%.

Today’s decision by the Bank left experts at odds with each other about if, or when, the first rate reduction will take place.

Julian Howard, chief multi-asset investment strategist at GAM, said: “The Bank of England left interest rates unchanged today at 5.25%, but the path appears increasingly clear for some easing at the August meeting. Inflation has come right down to the target level of 2%, unlike in the US and, to an extent, Europe.

“Some risks remain, however. The UK is in the middle of an election campaign and a potential Labour landslide could unsettle markets, in particular the currency. Sir Keir Starmer has come under pressure in recent days on the issue of tax and spending. Sterling will appreciate neither unfunded spending, nor a heavier tax burden. 

Lindsay James, investment strategist at Quilter Investors, said: “This decision is no real surprise given month-on-month figures suggest inflation is unlikely to remain at 2% for long. It is instead expected to rise again later this year and ultimately settle between 2% and 3%.

“Until recently, markets had been pricing in several BoE rate cuts this year, with the first previously expected in the summer. Given the hesitation around inflation, it is looking increasingly likely that the first cut will not materialise until November which means we could see just one or two cuts from the BoE this year after all.”

19 June: Bank Of England Expected To Hold Borrowing Costs At 5.25%

Annual inflation fell to 2% in the year to May 2024, its lowest level since July 2021, down from 2.3% recorded a month earlier, Andrew Michael writes.

This puts the rate at which prices are rising at the Bank of England’s long-term target, set by the government. But commentators say the news is unlikely to prompt the Bank to reduce borrowing costs when it announces its next Bank Rate decision tomorrow.

Today’s announcement from the Office for National Statistics (ONS) will be welcomed by individuals and businesses alike who endured a prolonged period of soaring prices through 2022, when the inflation figure hit 11.1%. It remained elevated for much of last year.

The monthly reading of the Consumer Prices Index (CPI) showed that prices rose by 0.3% in May compared with a figure of 0.7% a year earlier.

According to the ONS, the largest downward contribution to today’s headline figure came from food, with prices falling this year having risen at the same stage a year ago. Offset against this was the rising cost of motor fuel.

Core CPI, which omits volatile data covering food, energy and tobacco, stood at 3.5% in the year to May, compared with 3.9% a month earlier.

CPI including owner-occupier costs (CPIH) stood at 2.8% in the year to May 2024, compared with 3.0% 12 months earlier. On a monthly basis, CPIH rose by 0.4% in May 2024 against a figure of…