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Market Analysis

Bank of England Dashes Sunak's Pre-Election Rate Cut Hopes
Amos Simanungkalit · 12.2K Views

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Any lingering hopes Prime Minister Rishi Sunak might still have for a pre-election interest rate cut are likely to be dashed next week, as the Bank of England is set to signal that lower borrowing costs will likely await Britain's next government instead.

 

The BoE has been moving towards its first rate reduction since the start of the coronavirus pandemic over four years ago, prompting Sunak to reassure voters, still feeling the pinch from the cost-of-living crisis, that a turning point is near.

 

However, for Sunak and his struggling Conservative Party, Britain's inflation pressures appear too persistent for the BoE to cut rates at its June 20 meeting—the last one before the election—and join other central banks that have done so.

 

A Reuters poll published on Wednesday revealed that 63 of 65 economists believe the first cut won't come until August 1. Most also anticipate another reduction before the year's end.

 

Two analysts predict the BoE's first move will come in September. None expect a cut on Thursday following the BoE's June meeting.

 

"They can afford to wait," said Peter Dixon, head of EMEA country research at Fitch Solutions. "The ECB has acted, but globally the environment suggests the Bank can wait a little longer. Six weeks won't make a significant difference."

 

On Wednesday, the U.S. Federal Reserve pushed the start of its rate cuts to potentially as late as December.

 

The approach of Britain's July 4 election has prevented BoE policymakers from offering new hints about their next move.

 

Governor Andrew Bailey and his colleagues canceled all public events after Sunak called the election on May 22.

 

Inflation Pressures


Cutting borrowing costs before the election might be politically risky, but it's not without precedent: in May 2001, the BoE did so less than a month before voters went to the polls, part of a series of rate cuts that year.

 

However, recent economic data suggests the BoE won't face a pre-election dilemma next week.

 

While headline inflation has fallen close to the BoE's 2% target, it remained higher than expected in the crucial services sector in April, and 6% wage growth in May was roughly double the level consistent with the target.

 

Inflation data for May, due next Wednesday, just a day before the BoE announces its rates, is unlikely to significantly change the outlook.

 

Only two of the Monetary Policy Committee's nine members voted for a rate cut at their last meeting in May. Bailey—among the seven-strong majority who backed no change—said at the time that a change in policy in June was "neither ruled out nor a fait accompli."

 

But that was before April's strong inflation figures.

 

Additionally, Britain's economy began 2024 on a stronger footing than in the second half of 2023 when it entered a shallow recession, weakening the case for urgent support.

 

Analysts at Nomura expect another 7-2 vote in favor of keeping the Bank Rate at its 16-year high of 5.25% next week but see a chance that Deputy Governor Dave Ramsden might rejoin the majority in an 8-1 decision against a cut.

 

Unlike in past elections, the outcome of the July 4 vote does not seem to have significant immediate implications for the BoE.

 

The main opposition Labour Party, which is far ahead in the polls, set out its policy manifesto on Thursday with a promise to adhere to budget rules similar to those of the Conservatives and maintain the BoE's 2% inflation target.

 

"Nothing is going to frighten the horses in the short term," Dixon said. "I think it would be a relatively smooth handover from a monetary perspective."

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