Market Analysis

Britain's central bank is expected to maintain interest rates at a 16-year high of 5.25% on Thursday, as persistent underlying inflation pressures continue to pose challenges. This situation deprives Prime Minister Rishi Sunak of a potential boost ahead of the July 4 election.

Bank of England Governor Andrew Bailey suggested last month that a rate cut was a possibility, expressing optimism about positive economic trends and indicating that a June rate cut was an option, though not a certainty.

Despite recent data showing that headline inflation dropped to the BoE's 2% target in May for the first time in nearly three years—faster than in the United States or eurozone—the medium-term outlook remains uncertain.

Services price inflation has decreased less than the BoE anticipated, falling to 5.7% instead of the expected 5.3%, and private-sector wage growth remains almost double the rate the BoE considers compatible with 2% inflation.

Last month, the central bank projected that inflation would rise to around 2.6% by the end of the year as the impact of recent cuts to regulated household energy bills diminished.

None of the 65 economists surveyed in a Reuters poll last week expected the BoE to follow the European Central Bank's lead and cut rates this month, with the next statement on Aug. 1 being the most likely start date for a potential easing cycle.

Instead, a repeat of May's 7-2 vote split is anticipated, where Deputy Governor Dave Ramsden and external Monetary Policy Committee member Swati Dhingra voted for a quarter-point cut.

"We think the Bank of England is left waiting for more reassuring data ... either in the shape of a more decisive moderation in services CPI or with all other broader signals ... pointing in a softer direction," said Victoria Clarke, chief UK economist at Santander.

Although unemployment is at a two-and-a-half-year high of 4.4%, economic growth this year has been relatively robust by Britain's recent standards.

Financial markets are skeptical about an August rate cut, with only a 30% chance priced in on Wednesday. A first move is more likely in September, with a risk of delay until November, similar to expectations for the U.S. Federal Reserve.

Regardless, any rate cut is likely to be too late for Sunak, whose Conservative Party trails the opposition Labour Party by about 20 points in pre-election polls.

While Sunak has taken credit for the fall in inflation since he took office in October 2022, when it was at a 41-year high of 11.1%, Labour attributes high mortgage rates to economic mismanagement by the previous Conservative leader, Liz Truss.

Since the election campaign began, the BoE has entered a self-imposed period of silence, canceling public events.

Before this, BoE Chief Economist Huw Pill had described the focus on a June rate cut as "ill-advised," though both he and Deputy Governor Ben Broadbent—who steps down at the end of this month—acknowledged the possibility of a rate cut over the summer.

The BoE started raising rates in December 2021, earlier than other major central banks, reaching their current peak in August 2023.

Paraphrasing text from "Reuters" all rights reserved by the original author.