The Bank of England kept interest rates on hold at the highest level since 2008 on Thursday, even as UK inflation slowed to 2% in May, a key milestone.
Policy makers left interest rates unchanged at 5.25%, their 10th month fix. Officials said high rates were cooling the labor market and easing price pressures, but added that monetary policy needed to remain tight until they were confident the risks of inflation exceeding their target had disappeared.
“It is good news that inflation is back towards our 2% target,” Bank of England Governor Andrew Bailey said in a statement. “We have decided to keep interest rates on hold because we need confidence that inflation will remain low.”
As inflation slows around the world, central banks are considering when and how much to cut interest rates. This month, the European Central Bank cut interest rates for the first time in nearly five years but has warned it will be cautious about future cuts. The U.S. Federal Reserve has also signaled it will cut interest rates just once this year, down from an earlier forecast of three.
Bank of England officials are divided over the timing of a rate cut. Data released on Wednesday showed annual inflation slowed to the central bank's 2% target in May, but the majority of policymakers voted to keep interest rates high. Two members of the nine-member interest rate-setting committee voted to cut rates again by 0.25 percentage point.
But the most important message from the central bank is that inflation must remain at its 2% target sustainably. There are still signs of persistent inflation that could keep price growth stubbornly high. For example, services sector inflation was 5.7% in May, well above the central bank's forecast of 5.3%.
There were also signs that wage growth in coming months will not slow as much as the central bank had expected, according to minutes of its policy meeting this week.
Policymakers have been scrutinizing wage data and services inflation, which are heavily driven by labor costs and tend to be the most stubborn form of inflation. They risk creating a wage spiral, which businesses pass on to consumers in the form of higher prices, which in turn leads to demands for further wage increases. UK officials have said they see no evidence of a price-wage spiral, but have expressed concern that price pressures could be strong enough to push inflation above its 2% target for a prolonged period.
Inflation is expected to pick up again later this year as energy prices stabilise and no longer drag down overall inflation.
Still, the possibility of an imminent rate cut remains: The central bank projected last month that inflation would bounce back sustainably to its 2% target in the second quarter of 2026 and could fall further. With the target in sight, the central bank has left the door firmly open to cutting rates.
But just two weeks after that prediction, British Chancellor Rishi Sunak announced a general election in early July. Investors, concerned that the move could be interpreted as politically motivated, quickly backtracked on expectations that the Bank of England would cut interest rates this week.
Policymakers are leaving open the possibility of a rate cut later this summer. Several committee members who voted to keep rates on hold this week argued that the decision was a “delicate balance,” according to minutes, suggesting they could change their vote to cut rates barring a major surprise. The Fed's next policy meeting is scheduled for early August.
“It is clear that the committee is moving closer to a rate cut,” ING Bank economists wrote in a client note. “Assuming the next inflation report in mid-July contains no surprises, we still believe the bank will vote in favor of a rate cut in August.”
