"All signs suggest that, once election turbulence subsides, the Bank will commence rate cuts, although it's dangerous to take that for granted."
- Paresh Raja, CEO of Market Financial Solutions
The Bank of England's Monetary Policy Committee has voted 7-2 to maintain Bank Rate at 5.25%, despite inflation falling to the Bank's 2% target.
Two members preferred to reduce Bank Rate by 0.25%, the same as the previous month.
The Committee noted that CPI inflation is expected to rise slightly in the second half of this year, as declines in energy prices last year fall out of the annual comparison, adding that "key indicators of inflation persistence have continued to moderate, although they remain elevated".
In its minutes, the MPC said: "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."
Interest rates have now been at 5.25% since August 2023, with some economists predicting that rates will be cut at the MPC's next meeting in August.
However, markets are currently pricing in a rate cut in November, with the timing of the next rate cut likely to be impacted by the outcome of the upcoming general election.
In addition, despite falling CPI inflation, the MPC will likely be seeking an easing in measures such as wage growth and services inflation before cutting rates.
Paresh Raja, CEO of Market Financial Solutions, commented: "Over the past ten months, as the Bank has decided to keep the base rate at 5.25% on seven consecutive occasions, it has been clear that it will delay cuts for as long as it needs to. But with inflation now at 2%, and the European Central Bank having made cuts, the pressure is mounting - all signs suggest that, once election turbulence subsides, the Bank will commence rate cuts, although it's dangerous to take that for granted. All eyes will be on its next meeting on 1st August.
"Still, lenders, brokers and borrowers cannot get carried away. Cuts to the base rate will likely come in the second half of the year, but rates will not tumble back to the levels many had become accustomed to between 2008 and 2022. Yes, even a small drop in rates will benefit borrowers and inject more life into the property market, but the cost of borrowing has moved on, and the market is adjusting to that.
"As lenders, the onus is on us to provide flexibility and optionality to borrowers. Some may want the certainty of a fixed-term product, others would rather have a tracker in the hope that the base rate tumbles faster than expected; some will be patient in waiting to see the fallout of the election, others are ready to act now. It is important all types of buyers are supported in what remains an uncertain political and economic climate."
Ben Allkins, head of mortgages and protection at Just Mortgages, said: “If there was ever a time for the Bank of England to finally pull its finger out, this was certainly it. Yet, in spite of inflation finally reaching the illusive 2% target, and recent GDP figures showing a flatlining economy, the MPC is still watching and waiting.
“While we can be encouraged by positive levels of buyer registrations and requests for valuations and appointments, a cut today would have been a real adrenaline shot to help carry us through a summer full of potential distractions – particularly with a general election. For now, we just have to hope swap rates react favourably to further stability in the base rate, giving lenders some wiggle room to reprice.
“With potential borrowers still desperately trying to navigate the market and deal with clear affordability challenges, brokers must stay visible and proactive, highlighting the wealth of options out there to support all types of borrower, as well as the cash that is still available from lenders willing to lend.”
Lindsay James, investment strategist at Quilter Investors, added: “Though inflation hitting 2% marked a significant milestone, it is simply not enough to allow the Bank of England to declare job done. Instead, the monetary policy committee has opted to leave interest rates unchanged once more.
“While it will come as a bitter blow to the Conservative party, this decision is no real surprise given month-on-month figures suggest inflation is unlikely to remain at 2% for long. It is instead expected to rise again later this year and ultimately settle between 2% and 3%. The Bank will be keeping a keen eye on wage growth, which remains around 6%, as well as services inflation which has been taking its time in coming down and has continued to feed into elevated core inflation. With the Labour Force Participation Rate still trending down and at the lowest level since 2015, a worker shortage is one crucial inflationary factor that will need addressing by the incoming government. Given the Bank’s focus on sustainably returning inflation to the target in the medium term, it could be some time yet before we see a cut.
“Until recently, markets had been pricing in several BoE rate cuts this year, with the first previously expected in the summer. Given the hesitation around inflation, it is looking increasingly likely that the first cut will not materialise until November which means we could see just one or two cuts from the BoE this year after all. This would put the BoE roughly in alignment with the Federal Reserve, which now expects to make just one rate cut this year, and trailing behind the European Central Bank which has already fired the starting gun."
