The Bank of England decided to keep the Bank Rate unchanged at 5.25% for the seventh straight meeting during its June meeting, as widely predicted by market participants.
Seven members of the Monetary Policy Committee voted to keep rates unchanged, while Swati Dhingra and Dave Ramsden favoured a 0.25 percentage point reduction, bringing the rate to 5%.
In its statement, policymakers noted that the restrictive monetary policy is weighing on real economic activity, leading to a looser labour market and curbing inflationary pressures. Despite the labour market easing, the Bank of England highlighted that it remains tight by historical standards.
The Monetary Policy Committee emphasised that the timing of the UK election on 4 July did not influence the rate decision, which some members considered "finely balanced."
On the inflation front, the Consumer Price Index (CPI) met the 2% annual inflation target in May for the first time in nearly three years.
However, services inflation, a key indicator for the central bank, exceeded expectations. Services CPI inflation was 5.7% in May, down from 6.0% in March but still higher than projected in the May report. Conversely, core goods price inflation was weaker than anticipated.
Some members cautioned that the return to 2% CPI was not necessarily indicative of a sustained return to target.
Looking ahead, the Bank of England expects inflation to rise slightly in the second half of the year as the previous year's decline in energy prices drops out of the annual comparison.
The bank reiterated that monetary policy must remain restrictive for a sufficiently long period to ensure inflation returns to the 2% target sustainably in the medium term, in line with the MPC's remit.
Dhingra and Ramsden, who advocated for a rate cut, argued that easing the Bank Rate now would facilitate a smooth and gradual policy transition, considering transmission lags.
The current Bank Rate is now 3.25 percentage points above the annual inflation rate, marking the highest real interest rate in the United Kingdom since October 2007.
Market reactions
Traders slightly increased their bets on a potential rate cut at the Bank of England's August meeting, with interest rate futures pricing in about 20 basis points of cuts.
Markets are pricing in 47 basis points of cuts this year, suggesting another reduction by year-end.
Gilt yields dropped sharply, with the policy-sensitive 2-year gilt yield falling to 4.13%, the lowest in three months. The 10-year gilt yield also fell to 4.04%, the lowest since 10 April.
The British pound weakened below 1.27 against the US dollar, while the euro gained slightly to 0.8450 versus the sterling.
The FTSE 100 index rose by 0.2% after the announcement, eyeing its highest daily close since 10 June. Top performers included Fresnillo, Land Securities, and JD Sports Fashion, with gains of 3.7%, 3.1%, and 3%, respectively.
