Bank of England maintains interest rates at 5.25% in June
20th June 2024
Commenting on the latest interest rate decision today, Ross Barr, Senior Multi-Asset Strategist, said:
“Today, the Monetary Policy Committee (MPC) again voted to maintain bank rate at 5.25%. This was in line with market expectations.
The Bank had cancelled all public statements and speeches by policymakers during the General Election campaign. Whilst there is no prohibition upon the MPC changing bank rate, any change today would have left the MPC open to criticism for partisanship. Nevertheless, today’s minutes note that the timing of the General Election was not relevant to their decision.
As was the case in May, the vote was split (7 to 2) with a minority of MPC members voting for a rate cut to 5.00% – David Ramsden and Swati Dhingra remain as the dissenting voices.
Inflation trends have improved through the year
Whilst headline inflation fell to match the Bank’s 2% target this month, we continue to expect the Bank to move cautiously. Services CPI, a key point of focus for the Bank, remains elevated and sticky. We do however expect underlying inflationary pressures to ease gradually through the year and for the Bank to start cutting rates in August.
The overall tone of the MPC’s statement is consistent with this view. Notably, the Bank observes that “developments since the previous MPC meeting and how these informed the assessment that the risks from inflation persistence were receding.”1
Fiscal conditions will limit the incoming government’s room for manoeuvre
Current polling suggests a strong likelihood that the next government will be formed by the Labour party. The Labour party’s manifesto pledges are exceedingly cautious with respect to fiscal policy – this is to be expected given the very limited scope that any incoming government will have to deliver expansionary fiscal policy given the UK’s net debt rule.
We expect some support for the UK’s growth outlook to come from supply-side measures, notably the Labour party’s intention to pursue a more favourable trade relationship with the European Union.
The overall outlook for the UK economy is modest; we continue to expect to see only a shallow recovery to continue through this year and into 2025. Market consensus has moved towards our long-standing cautious view. The onus may well fall upon monetary policy to support the UK economy as recovery progresses into next year, with the Bank highlighting that monetary policy settings are presently restrictive and would remain so even if Bank Rate were to reduce.
1 Source: https://www.bankofengland.co.uk/monetary-policy-summary-and-minutes/2024/june-2024, paragraph 36
