Borrowing unchanged

Bank rate held at 5.25% as market expects August cut

Andrew Bailey
Bank governor Andrew Bailey

The Bank of England has held interest rates at 5.25% for the for the seventh consecutive meeting, as widely expected, and hinted at an August cut.

Its monetary policy commitee voted by a majority of 7–2 to maintain Bank Rate at 5.25%.  Dave Ramsden and Swati Dhingra  preferred to reduce it by 0.25 percentage points, to 5%.

Figures revealed yesterday showed inflation has fallen to the Bank’s 2% target for the first time in almost three years.

High inflation in the services sector and faster-than-expected wage growth reinforced the majority’s view that it was too soon to cut rates.

Inflation is expected to rise slightly in the second half of this year, as declines in energy prices last year fall out of the annual comparison.

The Bank’s governor Andrew Bailey, said: “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.”

Analysts believe the first cut in interest rates will take place either in August or even as late as November if price pressures continue.

Rob Clarry, investment strategist at wealth management firm Evelyn Partners, said: “Markets appear to have taken the communications from today’s meeting as a sign that rate cuts are close.

“Interest rate sensitive sectors, such as housebuilding, rallied. While money market traders now assign a 60% chance of an August rate cut, up from 30% yesterday. The next month of data will be crucial.”

The prospect of an August cut meant sterling weakened which lifted London’s FTSE 100 index by 67.35 points (0.82%) to close at 8,272.46 as a weaker pound is good for its large number of overseas earners.

In today’s statement, the Bank says UK GDP “appears to have grown more strongly than expected during the first half of this year.” Business surveys, however, remain consistent with a slower pace of underlying growth, of around 0.25% per quarter.

“The considerable uncertainty around estimates derived from the ONS Labour Force Survey means that it is very difficult to gauge the evolution of labour market activity. Based on a broad set of indicators, the MPC judges that the labour market continues to loosen but that it remains relatively tight by historical standards.”

This was the last meeting for deputy governor Ben Broadbent, who will be replaced by Clare Lombardelli in August.

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