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Bank of England keeps interest rates at 5.25% in May

Commenting on the Bank of England’s May Monetary Policy Meeting, Shweta Singh, Chief Economist at Cardano, said:

Today, the Monetary Policy Committee (MPC) again voted to maintain Bank Rate at 5.25%. Notably, the vote was split (7 to 2) with a minority of MPC members voting for a rate cut to 5.00% – David Ramsden has joined Swati Dhingra in voting to ease this time around. So, whilst there is no change in monetary policy settings today, the suggestion is now firmly that the commencement of the Bank’s easing cycle is close at hand.

Over the past month David Ramsden had indicated that he was moving closer towards changing his vote to support Bank Rate cuts.

Inflation not decisively tamed

Irrespective of today’s decision it is evident that the Bank will move cautiously whilst inflation remains above target. Our view is that inflation is not yet decisively tamed.

Today’s decision was accompanied by updated economic forecasts. Growth forecasts have been nudged higher marginally and continue to reflect an improving growth view as the economy recovers from the shallow recession experienced at the turn of the year. The outlook for inflation is becoming more supportive of less restrictive monetary policy in the near term although it is not forecast to settle firmly below target until the middle of 2026. These new inflation forecasts from the Bank are slightly lower than those included in February’s monetary policy report.

The overall tone of the statement is that the MPC is very close to cutting Bank Rate. The statement added that ‘the Committee will consider forthcoming data releases and how these inform the assessment that the risks from inflation persistence are receding’.

June rate cut not our base case

Whilst a June rate cut is possible, this is not our base case. The risk of moving too soon is still there. A policy mistake could ease financial conditions and cause a resurgence in inflation expectations, especially as the full effects of recent adjustments to state pension payments, benefits and minimum wage levels are yet to be seen. Accordingly, we expect the MPC to err on the side of caution and wait until August to make their first policy adjustment for this cycle.

Looking further ahead, we expect gilt yields to fall this year. We expect inflationary pressures to ease sustainably, inflation expectations to remain well-anchored, and the labour market to rebalance. Growth whilst improving, will remain lacklustre. This will increase the value of UK Defined Benefit schemes’ liability benchmarks once again and emphasises the need for schemes to maintain robust liability and cash matching strategies.