Bank of England Holds Interest Rates Steady Despite Easing Inflation

The Bank of England (BoE) maintained its benchmark interest rate at 5.25% on Thursday, despite a recent slowdown in inflation. This decision reflects the central bank’s cautious approach, as it continues to monitor underlying price pressures and robust wage growth.

The Monetary Policy Committee (MPC) voted 7-2 to keep the rate unchanged, with a minority favoring a 25 basis point cut. The BoE acknowledged the recent drop in consumer inflation to its 2% target in May, a significant milestone after nearly three years. However, the central bank expressed concerns about persistent wage growth and underlying price pressures, indicating that a return to the inflation target alone does not guarantee an immediate easing of monetary policy.

Earlier this month, BoE Governor Andrew Bailey had hinted at the possibility of a rate cut, expressing optimism about the direction of the economy. However, recent data has not been sufficiently compelling to warrant such a move.

Market expectations for a rate cut have shifted towards August, with economists polled by Reuters largely anticipating a move then. However, traders are pricing in only a 30% chance of an August cut, with a full rate cut more likely by November.

The British pound experienced a slight weakening against the dollar following the announcement, while the rate-sensitive 2-year Gilt yield ticked higher. The FTSE 100 index, meanwhile, saw a marginal increase.

The BoE’s decision to hold rates steady underscores its commitment to carefully balancing the need to control inflation with supporting economic growth. As the central bank continues to assess the evolving economic landscape, market participants will closely monitor future data releases and policy statements for clues about the timing and magnitude of any potential rate adjustments.