UK interest rates remain at 16-year high ahead of election

The Bank of England has left interest rates unchanged at 5.25%, a 16-year high, despite inflation falling back to its 2% target as the UK heads to the polls.

This is now the seventh consecutive meeting where the monetary policy committee (MPC) has decided to leave its policy rate unchanged, despite higher borrowing costs hitting mortgage holders hard.

The MPC voted by a majority of 7–2 to keep borrowing costs at their highest level since 2008, where they have stood since August last year. Swati Dhingra and Dave Ramsden again voted to cut rates to 5%.

Inflation fell back to 2% in May but persistent price rises in the services sector, key to understanding domestic price pressures in the country’s services-oriented economy, raised concern among members of the MPC.

Andrew Bailey, the Bank’s governor, said: “It’s good news that inflation has returned to our 2% target. We need to be sure that inflation will stay low and that’s why we’ve decided to hold rates at 5.25% for now.”

Economists noted it was unlikely that the Bank of England would be willing to start cutting interest rates in the middle of an election campaign.

Read more: Trending tickers: Nvidia, Constellation, Dell and NatWest

Threadneedle Street is in a holding position as it abides by the rules of the pre-election campaign period, meaning its policymakers cannot make any speeches or public statements.

However, the BoE said that did not weigh on the decision. "The committee noted that the timing of the general election on 4 July was not relevant to its decision at this meeting, which would as usual be made on the basis of what was judged necessary to achieve the 2% inflation target sustainably in the medium term," it said.

Kevin Shaw, national sales managing director at LRG, said: “The Bank of England’s decision to hold interest rates at 5.25% is no surprise given the proximity to the general election: had the Bank lowered rates for the first time in 11 months just two weeks before the polls, the decision may have been interpreted as politicking.

“But a drop of at least 0.25% on 1 August seems an inevitability given yesterday’s further drop in inflation and the inclination of some Committee members to reduce the rate previously.

“So while I wouldn’t dare to predict the news headlines on 5 July, I am reasonably confident in predicting a drop in interest rates on 1 August.”

The Bank of England is independent of the government and its main role is to keep inflation, which measures the rate consumer prices rise at, stable at 2%.

Laura Suter, AJ Bell’s personal finance director, also believes August will bring an interest rate cut.

“It’s highly likely the Bank will want to wait to see the outcome of the election and the final economic plans before making that first cut,” she said.

“With no meeting in July, that means all eyes are now firmly on the August meeting for our first potential cut to rates,” she added.

Money markets indicate that there is a more than 50% chance of a quarter of a point rate cut at the Bank’s next meeting, compared to 32% before its latest decision.

Yael Selfin, chief economist at KPMG UK, said: “We continue to expect the first rate cut in August, once the general election is over as inflationary pressures continue to ebb.”

Ruth Gregory, deputy chief UK economist at Capital Economics, said the BoE “continued to give the impression that the pieces of the puzzle are almost in place for it to cut rates”.

She added: “The upshot is that we are sticking to our view that the Bank will first cut rates from 5.25% in August and we still think that, due to inflation falling to 1.5% later this year, the Bank will reduce rates to 3% next year rather than to 4% as markets expect.”

Read more: Pound dips and gilt yields fall after Bank of England holds rates

Traders are also now betting that there will likely be two interest rate cuts before the end of the year.

Professor Joe Nellis, MHA’s economic adviser, said: “We believe the MPC is playing a sensible wait-and-see game and awaiting some further reassurance that the inflation dragon has been effectively slain before it pulls the trigger to possibly cut rates on 1 August. The still too high services sector figure of 5.7% for May revealed yesterday was no doubt a major deciding factor in the decision to hold.

“Even if rates are cut on 1 August, it is likely to be only one of two cuts that the Bank of England will make this year given that inflation could spike again towards the end of the year as seasonal factors push up energy costs and wage growth remains strong."

Governor Bailey opened the door early last month to a rate cut, saying he was "optimistic that things are moving in the right direction" and that a June rate cut was an option – although no fait accompli.

The tally of global interest rate cuts in 2024 stands at 70, according to website CBRates, after the reductions from the Bank of Canada and the European Central Bank this month.

Norway’s central bank has postponed a first interest rate cut until 2025 as it kept borrowing costs on hold at 16-year highs. Meanwhile, the Swiss National Bank has cut interest rates for the second meeting in a row in a move which has surprised markets.

The US Federal Reserve last week kept its key interest rate unchanged and signalled that just one cut is expected before the end of the year.

Although the Bank of England is now expected to follow the ECB’s example and move before the US Federal Reserve, the degree to which UK rates can diverge from those in America could still limit the MPC’s room for manoeuvre” AJ Bell said.

Read more: Federal Reserve holds interest rates steady

“Too big a gap between the UK base rate and the Fed funds rate could suck capital out of sterling and into dollars, weakening the British currency, at the risk of boosting inflation thanks to how the UK buys and imports more than it sells and exports,” analysts at AJ Bell added.

The decision to keep interest rates at 5.25% means that mortgage holders and prospective home owners will remain squeezed given the higher borrowing costs.

"While today’s announcement is positive for savers, it prolongs the misery for borrowers. Those with credit cards, loans, or mortgages will likely feel disillusioned that despite inflation hitting the Bank of England’s 2% target, the base rate remains unchanged. High interest rates are adding significant pressure to household budgets, particularly for those with limited financial flexibility," CEO of My Community Finance, Tobias Gruber, said.

“It's a bitter pill to swallow for homeowners in particular, who have been forced to shoulder the burden of getting inflation under control, while the banks continue to make record profits. This situation raises fundamental questions about the fairness of the current economic approach and whether it genuinely serves the interests of hardworking individuals," he added.

The Bank of England’s rate-setters will meet again to decide on interest rates on 1 August.

Watch: How does inflation affect interest rates?

Download the Yahoo Finance app, available for Apple and Android.