The Bank of England kept interest rates on Thursday at their highest level since 2008, even as inflation in Britain slowed to 2% in May, an important milestone.
Policymakers kept interest rates at 5.25%, where they have been for 10 months. Officials said high interest rates were working and cooling the labor market, easing price pressures, but added that monetary policy should remain accommodative until they were sure the risk of inflation overshooting their target had subsided.
“It is good news that inflation has returned to the 2 percent target,” Andrew Bailey, governor of the Bank of England, said in a statement. “We have to be sure that inflation will remain low and that’s why we decided to keep interest rates.”
As inflation has slowed around the world, central banks are scrambling to determine when and by how much they should cut interest rates. This month, the European Central Bank cut interest rates for the first time in about five years, but warned it would take a cautious approach to future cuts. The Federal Reserve also said it would cut interest rates just once this year, down from an earlier forecast of three cuts.
Bank of England officials remain divided on the timing of rate cuts. A majority of policymakers voted to leave interest rates at their high levels, even though data released on Wednesday showed that the annual rate of inflation had slowed in May to 2%, the central bank’s target. Two members of the nine-person rate-setting committee again voted to cut rates by a quarter.
But the dominant message from the central bank was that inflation must remain at the 2 percent target in a sustainable manner. There are still signs of prolonged inflation persistence that could keep price increases at persistently high levels. For example, inflation in the services sector was 5.7 percent in May, which was significantly higher than the central bank’s forecast of 5.3 percent.
There were also signs that wage growth will not ease in coming months as much as the bank had predicted, according to minutes of this week’s policy meeting.
Policymakers are scrutinizing wage data and services inflation, which are heavily influenced by labor costs and tend to be the most persistent forms of inflation. They risk creating a spiral of higher fees, which companies pass on to consumers in the form of higher prices, which then leads to demands for higher fees. British officials have said they see no evidence of a price-wage spiral, but have expressed concern that price pressures would be strong enough to keep inflation above the 2% 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 headline 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 possibly decline – in the second quarter of 2026. With the target in sight, the bank has steadily opened the door to rate cuts.
But just a few weeks after that prediction, Rishi Sunak, Britain’s prime minister, called a general election in early July. Investors quickly hedged all bets that the Bank of England would cut interest rates this week if the move was interpreted as politically motivated.
Policymakers continued to keep the door open to rate cuts later this summer. Several committee members who voted this week to keep rates steady argued their decision was “finely balanced,” according to the minutes, suggesting that barring major surprises, they could swing their vote to a cut. The next policy meeting is in early August.
