The Bank of England held interest rates at a 16-year high of 5.25 per cent for the seventh time in a row at their latest meeting of the Monetary Policy Committee (MPC). The decision came despite a fall in inflation figures, which showed price rises of just 2 per cent in May, meeting the BoE target. The bank’s rate-setting committee voted 7 to 2 to maintain the rate as is, though some members reportedly described the decision not to back a cut as “finely balanced”. With the bank’s governor said to be among those in favour of bringing down borrowing costs, observers are now looking toward August as the possible first rate cut since March 2020.

Why did the Bank of England hold interest rates?

In the words of the Bank of England, it is to slow down price rises and inflation. In a statement issued on June 20, following the decision to hold rates yet again, the bank insisted the plan ‘is working’ but it needed more evidence inflation would stay low before it would cut interest rates. A spokesperson added that ‘price stability takes primacy’ in the UK’s monetary framework, arguing monetary policy would need to “[R]emain restrictive for sufficiently long to return inflation to the 2% target sustainably in the medium term in line with the MPC remit.”

We can glean further insight into the decision by looking at the minutes of the bank’s latest meeting of the MPC on June 19. The records show committee members weighed a number of considerations, including the state of the international economy, inflation and UK output. They showed that the return to inflation levels of 2 per cent in May was not roundly considered sufficient to demonstrate a “sustained return to target.”

But two dissenting members of the decision-making body had pressed for a 0.25 per cent cut, arguing:

“CPI inflation had been on a firm downward trajectory for some time and had returned to the 2 per cent target in May. It was forecast to stay close to 2 per cent in the short term, consistent with further easing in the labour market, forward-looking indicators of inflation and pass-through, and continued falls in inflation expectations.

“Given the subdued outlook for demand, the risks to inflation remaining sustainably at the target in the medium term were to the downside.”

When will the Bank of England cut interest rates?

Some analysts are now expecting an interest rate cut in August. As per CNN the deputy chief UK economist at Capital Economics, Ruth Gregory said in a note that “several developments implied a rate cut is getting closer.” On Friday James Smith at ING said: “It sounds like we are getting closer to a summer rate cut,” adding “At ING we are expecting the first move in August,”

Michael Field, the European market strategist at Morningstar, said it was now a question of ‘when not if’ the MPC would slash interest rates.

Commenting, he said:

“The MPC’s previous [May] statement contained a number of caveats, particularly around services inflation. We see this less so in today’s statement, with an overall acknowledgement that inflation has fallen sufficiently, as headline inflation for the UK in May fell to 2 per cent, in line with the Bank’s targeted level.

“We expected that the vote split among committee members might have changed from the 7-2 level last month, but this was not the case. We are not dismayed by this, however, as the MPC often moves as a pack.

“Some investors will naturally be disappointed not to see an early rate cut, but if there’s one important takeaway from today’s statement, it is that the MPC is following the data. The data is clearly moving in the right direction, and therefore, rate cuts will have to follow.”

And speaking to The Guardian, Suren Thiru at ICAEW said:

“Given the Bank is now forecasting inflation to fall more quickly, an interest rate cut by the end of the summer remains very much on the table.”

While we can’t be sure when the Bank of England will cut interest rates and by how much, it now appears that it is likely to cut interest rates in the coming months, assuming inflation remains low.

What is the impact of high interest rates?

High interest rates can be a tool used to combat inflation. By making the cost of borrowing more expensive, and encouraging people to save, spending is discouraged, and the supply of money is suppressed. However high interest rates over an extended period can have negative consequences, particularly for mortgage holders, business owners and the wider economy.

Responding to the BoE’s decision to hold interest rates, the CEO of one of the world’s largest independent financial advisory organisations branded the decision “disappointing.” Commenting, Nigel Green, CEO of the deVere Group said:

“While the decision to maintain the current interest rate level is disappointing, it is not entirely unexpected.

“The MPC has missed an opportunity to alleviate some of the financial strain on households and businesses.
 
“With inflation now back at the target level, there was a strong case for a rate cut to support economic growth and provide some relief to those struggling with high borrowing costs.”

Among those hoping for a fall in interest rates are many in the property industry, as per Property Industry Eye. Commenting on the BoE decision, Tony Gambrill, of Chestertons, said:

“Property buyers have been waiting for interest rates to go down for months and will feel deflated after the Bank of England did not announce a rate cut despite inflation dropping to its 2% target.

“Still, we are seeing some buyers proceeding with their purchase now, regardless of interest rates, as they expect any rate cut to trigger an uptake in buyer activity that will inevitably boost property prices.

“To avoid having to pay more for their property further down the line, these buyers act now as they predict the difference they can save between current and future asking prices to be greater than the savings to be had by lower interest rates.”

A March report by the British Chamber of Commerce found a third of 1,000 UK businesses surveyed said interest rates were impacting them negatively, while less than one in ten said high interest rates were a good thing for them. Director of Policy at the BCC, Alex Veitch, speaking before the BoE took its June decision to hold rates, said:

“Firms tell us every day that they are struggling to pay off debts, some dating from the pandemic, and finding it difficult to take out new loans.
 
“Business investment is fundamental to the economic growth everybody wants, but firms will only be able to invest when their financial burdens ease.
  
“Expectation continues to mount that a cut in the interest rate is on the horizon, and this is likely reflected in the lower negative impact cited by businesses now compared to July last year.
 
“But with firms indicating that a rate of 4 per cent would be acceptable, it suggests there is some way to go before the squeeze on companies’ borrowing costs is relieved.”

Will the Bank of England cut interest rates in the summer?

While the Bank of England’s decision to maintain the interest rate at 5.25 per cent has generated mixed reactions, the outlook for a rate cut in the near future is becoming more favourable. With inflation dropping to the BoE’s target of 2 per cent and a growing clamour among more hawkish economists and financial analysts, an interest rate cut as early as August could be on the cards.

The Bank’s cautious approach reflects its commitment to ensuring sustained price stability before easing monetary policy. However, the economic strain on households and businesses from prolonged high interest rates is evident, underscoring the case for a balanced and timely adjustment.

Ultimately, the timing and extent of any rate reductions will be subject to an emerging and ever-changing economic picture and the BoE’s assessment of inflationary pressures. The decision to cut will come when it considers the threat of inflation satisfactorily squashed.