The Bank of England will maintain interest rates even though inflation is likely to fall towards the target

The Bank of England will leave interest rates unchanged for the seventh time in a row when interest rate setters meet on Thursday. This means that bank interest rates will remain at their highest level in sixteen years.

The Monetary Policy Committee (MPC) left the door open to a rate cut in June at its last meeting in May, but since then a number of data releases have indicated persistent inflation pressures.

“The BoE has made it clear that economic data will determine when it cuts bank rates,” said Ruth Gregory, deputy chief Britain economist at Capital Economics. “And the tone of the incoming data since then has been disappointing.”

April inflation figures showed that services inflation, which the Bank has identified as a crucial gauge of domestic price pressures, fell much less than expected. Inflation in the services sector remains around six percent, more than twice the level consistent with the two percent inflation target.

Similarly, the latest labor market figures, released last week, showed private sector employment at 5.8 percent.

These two measures are crucial for understanding the underlying inflationary dynamics in the economy. With both measures coming in slightly better than expected, policymakers are unlikely to be confident enough to cut rates this week.

Moreover, most economists think it is very unlikely that the Bank of England would be willing to cut interest rates in the middle of an election campaign.

Any decision to cut rates just weeks before election day could have drawn the Bank into the political debate. Members of the MPC have also had to cancel their public speeches during the election campaign, making it much more difficult for them to explain their approach to policymaking.

All this means that the Bank is in a holding position. Policymakers know the next step will be a rate cut, but they don’t know exactly when that will come.

Most economists did not expect further guidance than that given in May. Analysts at Barclays said there would be “little to no change to the MPC guidance” this month.

Although interest rates will remain at 5.25 percent, some commentators still expect the Bank to cut them in August.

Much depends on the May inflation data, which will be released just a day before the Bank’s meeting. Economists widely expect nominal interest rates to return to 2 percent for the first time since July 2021. Services inflation is also expected to fall to around 5.5 percent.

The European Central Bank (ECB) cut rates for the first time in five years earlier this month, but the Fed opted to hold rates steady again, indicating only “modest” progress on inflation.