Bank of England Holds Rates Despite Hitting 2% Target

Morningstar

The Bank of England has repeated its previous policy of holding rates, mirroring precisely its Monetary Policy Committee’s (MPC) prior 9 May vote on UK interest rates.

At a meeting yesterday, a majority of 7-2 once more opted to hold rates, in defiance of what some felt was a pressure to lower rates now that inflation has hit the Bank’s own 2% target.

The decision means the Bank of England’s so-called “base rate” will be held at 5.25% – for the seventh consecutive time. A cut is now seen as most likely to occur in August.

The move was widely expected by markets, as demonstrated by overnight futures trading. Indeed, the market response was muted. Ahead of the vote, the FTSE 100 was up, and is now only slightly higher than at opening this morning, at 0.36%.

Why Has The BoE Held Rates?

In a statement, the BoE said a return to the 2% target had not been enough to convince the MPC to vote wholeheartedly for a cut.

“For some members within this group, the return of headline inflation to 2%, while welcome, was not necessarily indicative of the required sustained return to target,” it said.

“Continued high levels of, and upside news to, services inflation supported the view that second-round effects would maintain persistent upward pressure on underlying inflation.

“Wage growth had continued to exceed model-based estimates. Indicators of domestic demand were stronger than had been expected, and the risks to the outlook for activity were skewed to the upside.

“For these members, more evidence of diminishing inflation persistence was needed before reducing the degree of monetary policy restrictiveness.”

The statement will indicate to investors and traders that the BoE is approaching a rate cut very cautiously indeed, and that it could be some time before rates come down.

This is something of a departure from the upbeat picture markets had expected at the end of last year, when it was thought 2024 would be punctuated with multiple cuts by multiple central banks. In the US, some expected as many as five rate cuts in 2024.

How Are Fund Managers Reacting to the Rate Hold?

In a note, Georgina Hamilton, fund manager of the Morningstar 4 Star and Gold-Rated Polar Capital UK Value Opportunities Fund, says the BoE is now clearly pursuing a “no surprises” approach.

“Core inflation should [now] start to show progress, paving the way for

The full article is available here. This article was published at Morningstar Economics.