Bank of England Interest Rates. Will They or Won’t They?
This month on June 20th the Bank of England’s MPC (Monetary Policy Committee) will meet and decide whether or not to keep interest rates on hold. At the last meeting of the MPC in May, interest rates were held at 5.25% for the sixth consecutive month and are still at their highest level since the Global Financial Crisis 2007 – 2009. The Bank of England’s target figure for inflation is 2% and in April it dipped to 2.3% which is a significant difference to March’s figure of 3.2%.
However, experts in the financial markets had expected CPI (Consumer Price Index a common measure for headline inflation) for April to come in at 2.1%. However an important element in core inflation (does not include figures from food and energy sectors) came in at 5.9% in April down only 0.1% from March. All the above figures are supplied by the ONS (Office of National Statistics).
At the May meeting of the MPC Governor Andrew Bailey indicated that June may see a cut in interest rates though it is not a “fait accompli”, whilst also advising that like other central banks any cut in interest rates will be data driven. In mid-May financial markets suggested that an interest rate cut in June was circa 60% as measured by the overnight index swaps*, but since the release of the April inflation figures in late May that suggestion of an interest rate cut has subsided mainly in part due to sticky service inflation figures.
*Overnight Index Swaps – This is a financial bet on the direction of short-term interest rates and is a type of interest rate swap. In this case, it is typically a fixed for floating swap, where one party pays a fixed rate and receives the floating rate (linked to an overnight index) while the other party does the opposite. The overnight index for sterling is known as Sonia (replaced sterling Libor) and stands for Sterling Overnight Index Average.So will the Bank of England cut interest rates on June 20th? A number of experts suggest that an interest rate cut may not happen as the services sector inflation remains a problem and came in a lot hotter than market analysts predicted. Many experts feel that services inflation remains a critical part of the Bank of England’s thinking regarding inflation and interest rate cuts, and therefore the MPC may well decide to once again hold rates on June 20th.
