The Bank of England has kept interest rates steady at 4.25%, with stubborn inflation prompting a cautious approach from the central bank.
The Monetary Policy Committee voted by a majority of 6-3 to keep rates unchanged, with three members voting for a 0.25% cut to 4%.
The decision to maintain the current rate had been widely expected against a backdrop of geopolitical tensions, economic uncertainty, inflation continuing to hover above 3% and the ripple effects of recent trade wars.
In its rate announcement on Thursday, the central bank said it believes a “gradual and careful approach” to the further withdrawal of monetary policy restraint remains appropriate, noting that monetary policy is not a “pre-set path.”
Tom Stevenson, investment director at Fidelity International, said: “The Bank of England is being pulled in opposite directions. On the one hand, the UK economy contracted sharply in April, wage growth has slowed, unemployment is creeping up, and business confidence is faltering. There is an argument to lower borrowing costs, therefore, to kick-start growth.
“On the other hand, UK inflation remained high in May at 3.4%, well above the Bank’s target of 2%. The rising price of food, furniture and household goods was partly to blame, and the conflict in the Middle East could complicate things further. Tensions have caused oil prices to surge, and this could eventually translate into higher household energy bills.”
Susannah Streeter, head of money and markets at Hargreaves Lansdown, said: “Policymakers are in a stalemate. Growth has seized up, but inflation has stayed stubbornly sticky. The labour market has shown signs of easing but not enough to erase worries about hot wage growth.
“In every direction, there’s a conundrum to confront, so policymakers have judged that pressing the pause button on rates is the best option for now. Given the unpredictable winds whistling through the world, global growth is set to slow, keeping activity in the UK highly sluggish.”
Despite the bank’s decision to hold steady, market analysts are predicting a further two cuts in 2025.
Streeter said: “The economy will need a shove to get moving again, and so two interest rate cuts are still on the horizon this year. Hopes for a summer rate reduction haven’t completely faded, with bets ramping up that a cut in August could provide the rays of relief that borrowers have been waiting for.”
Stevenson added: “Small, staggered rate cuts are in vogue for now, but we are only halfway through an eventful year.”
While the decision to hold rates may come as a disappointment to first-time buyers, those with large mortgages that need refinancing in the near future, and borrowers with oversized debts, it may come as a welcome relief to both savers and pension savers.
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, said maintaining the interest rate will contribute to a “sustained period of success” for the annuities market.
Main image: alicja-ziaj-AOjmfr3ofSY-unsplash
