Bank holds base rate at 5.25% for seventh time

Thursday, 20 June 2024 10:22

The Bank of England's Monetary Policy Committee (MPC) has voted 7-2 to keep the bank base rate at 5.25% for the seventh time amid signs that a potential base rate cut could come in the second half.

The base rate review was announced today by the Bank of England.

Experts have suggested the possibility of a base rate cut in the second half of this year but with no certainty this will happen. The Bank's base rate is currently at its highest level for 16 years.

Earlier this week ONS reported that the CPI rate of inflation had fallen to the Bank of England's long term target of 2%.

CPI inflation has fallen steadily after peaking at over 11% in 2022.

The Bank's MPC appears to be more confident that inflation is coming under control, potentially opening the door to interest rate cuts.

In its Monetary Policy Summary the MPC said:"At this meeting, the Committee voted to maintain Bank Rate at 5.25%. Headline CPI inflation has fallen back to the 2% target. The restrictive stance of monetary policy is weighing on activity in the real economy, is leading to a looser labour market and is bearing down on inflationary pressures. Key indicators of inflation persistence have continued to moderate, although they remain elevated"Monetary policy will need to remain restrictive for sufficiently long to return inflation to the 2% target sustainably in the medium term in line with the MPC’s remit. The Committee has judged since last autumn that monetary policy needs to be restrictive for an extended period of time until the risk of inflation becoming embedded above the 2% target dissipates.

"The MPC remains prepared to adjust monetary policy as warranted by economic data to return inflation to the 2% target sustainably. It will therefore continue to monitor closely indications of persistent inflationary pressures and resilience in the economy as a whole, including a range of measures of the underlying tightness of labour market conditions, wage growth and services price inflation.

"As part of the August forecast round, members of the Committee will consider all of the information available and how this affects the assessment that the risks from inflation persistence are receding. On that basis, the Committee will keep under review for how long Bank Rate should be maintained at its current level."

The MPC said that UK GDP appears to have grown more strongly than expected during the first half of this year but business surveys remain consistent with a slower pace of underlying growth, of around 0.25% per quarter.

The next base rate review will take place in August.

Ed Monk, associate director for personal investing at Fidelity International, said: “The ongoing General Election campaign had already handed the Bank of England a reason not to move on rates this month but even without that a cut was unlikely. Once again just two MPC members voted to cut.

“Wages continue to rise strongly at around 6%, adding to inflationary pressure, even if the Bank has reported some loosening of the labour market. Prices for services are also still running hot. It’s likely that rate-setters at the Bank will focus on that rather than the headline inflation numbers which is - for now at least - back on target.

“It all means the pain for borrowers goes on. With inflation back to 2% there will be increasing pressure on the Bank of England to justify the continuation of high rates. For savers, now represents a rare opportunity to achieve returns on their money which beat inflation by a clear margin."

Marc Devereux, head of Investment Consulting at pensions consultancy Broadstone, said: “The decision to hold rates at 5.25% will not have been a surprise for the market given wage and services inflation remains sticky. The election period reduces the usual additional guidance and commentary from the Bank of England, so market participants will be in a wait and see phase until the election is over and the next bank meeting in August."

Adam Ruddle, chief investment officer at LV= said: "The Bank was largely expected to hold rates as we near the election despite headline inflation falling within the Bank’s 2% target. We still believe rate cuts remain firmly in view with at least one rate cut before the end of the year.

"Although the headline inflation rate has fallen, people are continuing to face higher living costs and would welcome a rate change to help reduce their outgoings. According to LV= research, one in four mortgage holders are worried about the impact of rate rises on mortgage repayments.

“Inflation has fallen significantly but we believe some persistent drivers of inflation will hamper a smooth decline of inflation going forward which likely indicates that several future rate cuts are unlikely. Interest rates will most likely remain at an elevated level for longer.”