The Bank of England has held interest rates at 5.25% at the latest Monetary Policy Committee meeting, held today (9 May).
The members voted 7-2 in favour of holding rates, with two voting for a cut.
While the latest decision marks the sixth pause in a row, commentators say it has set expectations of an interest rate cut over the summer, potentially at the next meeting on 20 June.
Jeremy Batstone-Carr, European strategist at Raymond James Investment Services, said: “Ahead of 20 June, April’s CPI data on 22 May is expected to show that price increases have fallen sharply, laying the ground for rate cuts the following month.
“Although the labour market has shown signs of loosening, providing additional encouragement to the MPC, the possible inflationary consequences of a rate cut remain concerning to some the rate-setters. The Committee thus remains divided on the road ahead, with some finding that the pace of deflation is still too slow for comfort.”
However, Ed Monk, associate director at Fidelity International, believes the next meeting may come too soon to cut.
“Another MPC member willing to join the doves and call for a cut is a gentle signal that things are still heading in the right direction – albeit more slowly than markets and households might want,” he said.
“The last leg of problem inflation looks like it will be the hardest to shift and the majority view at the Bank is clearly still that inflationary pressures need to fall back further.
“In reminding that that policy must ‘remain restrictive for sufficiently long’ the Bank does not appear to be signalling an imminent rate cut – June now looks optimistically early. There will have to be a shift in language as the summer progresses if the first rate cut is to come through before the Autumn.”
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Nicholas Hyett, investment manager at Wealth Club, warns that the Bank has a delicate balancing act ahead between keeping inflation in check and lowering interest rates.
“The Bank of England continues to diagnose persistent inflation as the major danger facing the UK economy. However, it’s an increasingly delicate balancing act, and there’s a real risk the economic cure might end up being worse than the disease.
“To be fair the picture is murky. The market expects Friday’s GDP data to show the UK returned to growth in the first quarter, ending last year’s short-lived recession. But a 12% cut in the energy price cap will probably drag inflation back below the bank’s 2% target this month – at least temporarily. The former suggests interest rates are just fine where they are, the second that rates could do with a trim.
“The result is a natural inclination to sit on the fence a little longer, especially since cutting too early risks sinking sterling and kick starting another bout of inflation. Leave interest rate cuts too late though, and the Bank risks accidently cratering the economy in its eagerness to get inflation under control. The MPC’s two dissenters clearly think that risk is growing.”
This story was written by our sister title Portfolio Adviser
