The Bank of England on Thursday kept interest rates at their highest level since 2008, while inflation in Britain slowed to 2 percent in May, a key milestone.
Policymakers kept rates at 5.25 percent, steady for the past 10 months. Officials said higher rates were working and cooling the labor market, thereby easing pressures on prices, but they also said monetary policy would need to remain restrictive until they were confident the risk of inflation exceeding their target had passed.
“It's good news that inflation is back to our 2 percent target,” Bank of England Governor Andrew Bailey said in a statement. “We need to make sure inflation will stay low, and that's why we've decided to keep rates steady.”
As inflation rates slow around the world, central banks are trying to decide when and to what extent they should lower interest rates. This month, the European Central Bank cut rates for the first time in nearly five years, but warned that it would take a cautious approach to future cuts. The U.S. Federal Reserve also signaled it would cut rates only once this year, down from three cuts previously forecast.
Bank of England officials are divided on the timing of a rate cut. Data published on Wednesday showed the annual inflation rate slowed to 2 percent in May, the central bank's target, yet a majority of policymakers voted to leave rates at their high level. Two members of the nine-person rate-setting committee voted again to cut rates by a quarter point.
But the central bank's biggest message has been that inflation must remain anchored at the 2 percent target. There are still signs of persistent inflation that could keep price growth persistently high. For example, inflation in the services sector was 5.7 percent in May, well above the central bank's forecast of 5.3 percent.
There are also signs that wage growth will not slow as much in the coming months as the bank had forecast, according to the minutes from this week's policy meeting.
Policymakers are scrutinizing wage data and services inflation, which are heavily influenced by labor costs and are the most stubborn form of inflation. They risk creating a cycle of higher wages, which companies pass on to consumers in the form of higher prices, which are then followed by demands for higher pay. British officials have said they see no evidence of a price-wage spiral, but have raised concerns that price pressures will be so strong that inflation will stay above the 2 percent target for too long.
Inflation is also expected to rise again in the second half of this year, as energy prices, which have stabilized, will no longer drag down the overall inflation rate.
Still, rate cuts remain likely. Last month, the central bank forecast that inflation would return to the 2 percent target permanently — and possibly bottom in the second quarter of 2026. Given the target, the bank firmly opened the door for rate cuts.
But just weeks after that forecast, UK Prime Minister Rishi Sunak announced a general election for early July. Investors quickly abandoned bets that the Bank of England would lower interest rates this week, fearing the move could be politically motivated.
Policymakers have left the door open to a rate cut later this summer. Several committee members who voted to keep rates steady this week argued their decision was “very balanced,” according to the minutes, indicating that barring major surprises, they could change their vote to a cut. The next policy meeting is in early August.
“It is clear that the committee is approaching the point when it should cut rates,” ING Bank economists wrote in a note to clients. “Assuming there are no unpleasant surprises in the next inflation report in mid-July, we still think the Bank will vote to cut rates in August.”