The Bank of England kept interest rates on Thursday at their highest level since 2008 even as inflation in Britain slowed to 2 percent in May, an important milestone.
Policymakers kept rates at 5.25 percent, where they have been for 10 months. Officials said high rates were working and cooling the labor market, reducing price pressures, but they added that monetary policy would need to remain accommodative until they were sure the risk of inflation overshooting their target had disappeared.
“It is good news that inflation has returned to our 2 percent target,” Andrew Bailey, governor of the Bank of England, said in a statement. “We need to be sure that inflation will stay low and that is why we have decided to hold rates.”
As inflation has slowed around the world, central banks have been trying to determine when and to what extent they should cut interest rates. This month, the European Central Bank cut rates for the first time in around five years, but warned it would take a cautious approach to future cuts. The US Federal Reserve also indicated it will cut rates just once this year, down from an earlier forecast of three cuts.
Bank of England officials remain divided on the timing of the rate cut. Most policymakers voted to leave rates at their high levels even though data released on Wednesday showed that the annual rate of inflation had slowed in May to 2 percent, the central bank’s target. Two members of the nine-person rate-setting committee voted again to cut rates by a quarter point.
But the main message from the central bank has been that inflation should stay at the 2 percent target in a sustainable manner. There are still signs of inflation persistence that could keep price increases stubbornly high. For example, inflation in the services sector was 5.7 percent in May, which was significantly stronger than the central bank’s forecast of 5.3 percent.
There were also signs that wage growth would not ease in the coming months as much as the bank had predicted, according to minutes of this week’s policy meeting.
Policymakers have looked at data on wages and services inflation, which are heavily influenced by labor costs and tend to be the most stubborn forms of inflation. They risk creating a spiral of higher wages, which companies pass on to consumers in the form of higher prices, which then leads to higher wage demands. British officials have said they see no evidence of a price-wage spiral, but they have raised concerns that price pressures would be strong enough to keep inflation above the 2 percent target for too long.
Inflation is also expected to rise again in the second half of this year, because energy prices, which have stabilized, will no longer reduce the overall inflation rate.
However, the prospect of an imminent rate cut remained on the table. The central bank predicted last month that inflation would return steadily to its 2 percent target — and potentially taper — in the second quarter of 2026. With the target in sight, the bank left the door wide open for rate cuts.
But just weeks after this prediction, Rishi Sunak, Britain’s prime minister, called a general election in early July. Investors quickly took off all bets that the Bank of England would cut rates this week if the move was interpreted as politically motivated.
Policymakers continued to keep the door open to cutting rates later this summer. Some committee members who voted this week to keep rates steady argued their decision was “well-balanced,” according to the minutes, suggesting that barring any big surprises, they could swing their vote to a cut. The next policy meeting is in early August.
“It is clear that the committee is approaching the point of cutting rates,” economists at ING bank wrote in a note to clients. “Assuming that the upcoming mid-July inflation report does not contain any nasty surprises, we still think the bank will vote for a rate cut in August.”