The Bank of England's Monetary Policy Committee has voted 7-2 to hold Bank Rate at 3.75% amid ongoing political and economic uncertainty.
The vote was in line with consensus expectations, with a smaller probability of a 6-3 split.
Two members voted to increase Bank Rate by 0.25 percentage points, to 4%.
A hold was widely predicted after UK CPI inflation held steady at 2.8% in May. CPI fell to 2.8% in the year to April, down from 3.3% in March and 0.2% lower than economists expected. As a result, many economists had expected a bounce-back in inflation amid ongoing political uncertainty and inflated energy prices.
Global energy prices have fallen since the previous meeting in response to events in West Asia, however the Committee noted that they remain higher than pre-conflict and have continued to be volatile.
The impact of the energy shock on the UK economy remains uncertain, and the Bank's policy stance will "depend on the scale and duration of the shock, and how it propagates through the economy", the MPC members agreed.
Although CPI inflation has fallen to 2.8% since the previous meeting, it is expected to rise later this year as the effects of higher energy prices continue to pass through.
Yet, interest rates faced by households and businesses remain higher than prior to the conflict, which will act to reduce inflation over time.
Taking all the risks to the economic outlook into account, the Committee judged that "it is appropriate to maintain Bank Rate at this meeting".
Two members, Megan Greene and Huw Pill, preferred a 0.25% increase in Bank Rate at this meeting. These members were less confident in the pace of underlying disinflation pre-conflict and were more concerned over larger second-round effects of higher energy prices.
Paul Joyce, partner at LAVA Advisory Partners, commented: "If you’ve come to read about the Bank of England doing something unexpected, you're looking in the wrong place. Rate holds have become the 'go-to' response for the Bank of England, and each time they're met with a market-wide shrug, but that doesn’t mean that they are a bad thing. The market is dealing with capricious inflationary pressures, geopolitical uncertainty, and uneven confidence, so there is something almost reassuring about the MPC’s Groundhog Day impression every six weeks.
"In the twelve and a half years between April 2009 and November 2021, the Bank of England only changed the base rate five times. In the four and a half years since then, they've changed it 20 times. I know which of those periods I preferred.
"For dealmakers, this brand of boring can be good. Stability in the rate environment gives buyers, lenders, and management teams a little more confidence in their valuation assumptions, even if financing remains more expensive than it was a few years ago. It certainly makes running scenario analysis and upside/downside cases a little easier, and the range outputs a little narrower.
"Across professional services and financial services, we’re still seeing a healthy flow of transactions. Dealmakers aren’t waiting for the rates to drop, providing the fundamentals are strong, and while broader market conditions remain in flux, it’s largely business as usual.”
Rushabh Amin, multi asset solutions portfolio manager at Allspring Global Investments, said: “The OIS curve currently implies around two hikes, both skewed towards the back end of the year. The first move is now priced for September, having shifted forward from November as recently as 8th June. Further out, the curve suggests a relatively shallow hiking cycle, followed by a gradual easing back towards current levels.
"The Committee, like its global peers, continues to emphasise a wait-and-see approach. Policymakers are looking for signs of easing geopolitical pressures, which remain a key driver of inflation expectations and, in the UK’s case, a headwind to growth. While the MPC will have access to May CPI data ahead of the decision, leading indicators, including PMIs and ONS business surveys, continue to point to elevated price pressures. Wage growth, however, remains relatively contained, consistent with a softening labour market. Aside from a temporary uptick in Q1, indicators such as employment participation and vacancies continue to deteriorate. This leaves policymakers facing a difficult trade-off: tightening policy may help contain demand-driven inflation, but it does little to address supply-side pressures, where slower growth is ultimately the primary adjustment mechanism.
"Inflation pressures in the UK remain more persistent than in other G7 economies, reflecting structurally weaker productivity. Fiscal and monetary policy ultimately need to come together to form a growth-first mindset to break this cycle. This is unlikely in the near term and points to continued stagflationary pressures in the UK.”
John Phillips, CEO of Just Mortgages and Spicerhaart, commented: “I think even with the surprise news on inflation yesterday, this was always the most likely outcome. We shouldn’t be disappointed though, particularly with more hawkish members of the MPC calling for hikes. That threat does appear to be dissipating, but it’s certainly not gone for good. Even with the signing of an initial peace deal that intends to end the war, the impact of the Middle East conflict is still likely to feed through in the coming months – members will be conscious of this. I’d argue though that we also need to consider economic growth which wouldn’t be helped by any future increases in rates.
“Even with this backdrop, we have been seeing positive movements in the mortgage market and some increasing competition. The overriding message that brokers need to be sharing with clients is that there is still plenty of money out there and lenders that are willing to lend. Rate changes are coming with tweaks to products and criteria as lenders hit the halfway point of the year and look ahead to their end of year targets. Depending on where they are, lenders are having to be a bit more brave and bold in their appetite to risk and in their pricing to make sure they end the year where they want to be. This is good news for potential borrowers and all the more reason why they should rely on quality advice.”
Karen Rodrigues, director of sales at TAB, added: "This was absolutely the right call. Borrowers and brokers need stability right now, and a hold gives the market room to breathe.
"Our focus is on building momentum in lending, and that becomes very difficult when rate uncertainty is hanging over the market. Businesses are already navigating a challenging environment, and the labour market has cooled considerably. This is not the time to add further pressure. The committee made the right decision, and we hope it gives both lenders and borrowers the confidence to keep moving forward."
