The Bank of England Keeps Interest Rates on Hold

Today, the BOEs (Bank of England) MPC (Monetary Policy Committee) voted by 7 – 2 in favour of keeping interest rates steady at 3.75% with two dissenting members of Huw Pill and Megan Greene both voting to increase the rate by 25 basis points to 4.00%. The BOE has advised that inflation would pick up to just over 3.25% in Q4, lower than previously forecasted in April of this year. The decision to keep interest rates on hold came in the wake of data released showing the UK’s unemployment rate falling to 4.90% in the three months to April.

Recent data released from the ONS (Office of National Statistics) shows that the number of United Kingdom job vacancies fell to its lowest level for five years as businesses cut back on recruitment. On the inflation front the Governor of the BOE Andrew Bailey has advised that there “still is some inflationary pressure in the pipeline” with the Middle East crisis weighing negatively on energy and pushing up prices. He also stressed the political neutrality of the BOE but underlined the fact that political stability is critical during sensitive moments such as the upcoming Makerfield by-election as monetary policy relies on predictability.

Megan Greene, one of the two dissenting voters looking for a ¼% hike in interest rates highlighted the uncertainty over the impact on households and businesses of higher energy prices. However, Governor Bailey was quoted as saying, “Energy prices have come down quite a lot, but they are still above where they were before this conflict started. Inflation is higher than we expected it to be”. He went on to say, “I think holding is the right position to be in at the moment for that, so I think it is a sensible decision in light of the news”. Experts noted that the MPC met just before the Iran/United States peace deal was signed and when the MPC meets again at the end of July votes may well be swayed when the success and longevity of the peace deal will be clearer.

Analysts advise that financial markets reacted with a cautious but dovish tilt to the BOEs decision to keep interest rates at 3.75%with a notable shift in Sterling weakness and a fall in equities, as investors interpreted the BOEs downgraded inflation outlook as a signal that disinflation is taking hold. The money markets are pricing in the potential for one rate hike by the close of business 2026, and the swaps market is currently pricing in a higher for longer trajectory for central bank base rates with no immediate return to lower interest rates. Currently, experts are suggesting there is a wait and see outlook as to whether or not the Iran/US peace deal holds.