Why the Bank of England will hold interest rates
At every other meeting, the Bank of England publishes its monetary policy report alongside its interest rate decision. Each lengthy report includes fresh details on revisions to central forecasts, which are poured over with glee by economists and investors..
But this Thursday’s Monetary Policy Committee (MPC) meeting will offer few statistical goodies.
Officials will meet and come to a decision on interest rates, which markets generally expect to be left unchanged. Minutes from the meeting will underline the new problems the Bank faces in getting inflation down to two per cent, as well as the old ones.
The newest shock to rock the global economy and worry even the most dovish MPC members is the risk of an upturn in energy prices following an exchange of strikes between Israel and Iran, threatening the Strait of Hormuz, the only sea passage from the Persian Gulf to the open ocean.
Its potential closure could force the price of oil to jump to $130 a barrel from the current Brent Crude price level of around $73, according to Oxford Economics, risking a deterioration in inflation.
Rate-setters who dealt with the effects of the war in Ukraine and the alienation of Russia from global trade may feel well-equipped to respond to the latest energy market turmoil caused by yet another conflict.
But Bank officials will also be looking beyond British shores to low spirits in the US economy, the vulnerability of financial markets, and treatments in deals struck by the likes of China and the European Union with President Trump after the UK got a partial tariff reduction on car exports and food trade.
The widely-agreed prediction that Trump’s tariffs would weigh down on price growth due to trade diversion and hampered global demand is being tested in real-time. Deputy governors Sarah Breeden and Clare Lombardelli were among those to warn that tariffs could lead to an upswing in goods prices due to supply chain disruptions.
But perhaps what keeps Bank officials awake at night the most – literally, as Huw Pill and Alan Taylor recently revealed – is the bleak local picture. Most MPC members, including chief economist Pill and Governor Andrew Bailey, have warned that wage growth has been too strong for monetarists’ liking and consistently punched above Bank projections.
Hawk to dove scale
| MPC member | What they voted for in May | Details |
| Huw Pill | Hold | The Bank’s chief economist was presumed to be nailed-on to vote with the consensus view before he surprisingly voted to hold interest rates in May. In a speech hosted by Barclays last month, Pill warned cutting interest rates would fuel inflation as he revealed his regrets at how early the Bank began to cut rates in mid-2024. |
| Megan Greene | 25 basis point cut | Greene has previously voted for interest rates to be held when others voted for a cut. The external member, who used to be chief economist at Kroll, has warned Reeves’ taxes risked keeping inflation high while she has also advocated for a ‘wait-and-see’ approach on data proving inflation is coming down. |
| Clare Lombardelli | 25 basis point cut | Lombardelli’s interest rate cut vote in May was an “insurance” against the risks posed by Trump’s trade policies. But she has argued against a rush to interest rate cuts due to high wage growth and backed the Bank’s policy to take a “careful and gradual” approach. |
| Catherine Mann | Hold | A self-described “activist” member, Mann’s vote to hold interest rates at the last meeting shocked Bank watchers after she had voted for a 50 basis point cut in February. She is said to prefer making big, front-loaded cuts, breaking away from the Bank’s “gradual and careful” policy approach. Mann probably does not fit into your typical ‘dove’ or ‘hawk’ category. |
| Andrew Bailey | 25 basis point cut | The Bank Governor has suggested rate cuts were “shrouded in a lot more uncertainty” but he said the path “remains downwards”. What Bailey appears to fear most is the unpredictability of Trump’s trade policies. He might be somewhat worried about oil prices climbing. |
| Sarah Breeden | 25 basis point cut | Breeden, deputy governor at the Bank with oversight of financial stability, has suggested she would have voted for a rate cut in May even if Trump did not unveil damaging trade policies. She has also indicated that market predictions that policy will loosen is not far off the truth. |
| Dave Ramsden | 25 basis point cut | Markets and banking deputy governor Dave Ramsden has spoken out about the risks to the UK economy in supply and productivity. Its deterioration would “tend to push inflation up”, he said recently, suggesting he prefers the Bank to take early action on allowing investment attitudes to improve in order to reap the benefits later on. Ramsden has also voted for cuts when the majority went for a hold. |
| Alan Taylor | 50 basis point cut | Taylor has shown all the traits of a dovish MPC member willing to persuade colleagues that lower interest rates would boost the UK economy without rattling prices. As the MPC’s newest member, Taylor has indicated that the Bank needed to take more pre-emptive action rather than choose to sit on its backside. |
| Swati Dhingra | 50 basis point cut | By far the Bank’s most dovish rate-setter, Dhingra has consistently voted for cuts at meetings since early 2024. The trade expert has sounded the alarm on the UK’s lacklustre growth. |
Chancellor Reeves’ national insurance taxes on employers and hike to the national living wage announced in last year’s budget are still being processed by firms, according to recent business surveys, with many claiming they would raise prices further in the coming months.
Despite questions hanging over the Office for National Statistics (ONS)’s flagship labour force survey, the official data body revealed unemployment had crept up to 4.6 per cent as the number of payrolled employees had dropped by 274,000 over the last year.
Wage growth did slow down by more than expected in the three months to April, potentially easing nerves at the Bank.
Inflation has remained high, with April showing a year-on-year rise of 3.4 per cent in prices – despite an error by the ONS showing the rate had hit 3.5 per cent. Data to be published on Wednesday morning is expected to show price growth of 3.3 per cent in the 12 months to May.
Interest rates views of other economists
City AM asked six economists at City firms, business groups and think tanks for their views on interest rates ahead of the June meeting.
Three economists said they would vote for interest rates to be held, with veteran Centre for Economics and Business Research economist Vicky Pryce, Policy Exchange’s Ben Ramanauskas and the Institute for Economic Affairs’ Julian Jessop opting for a 25 basis point cut.
“Even if inflation is somewhat elevated, this is likely, bar a new energy shock, to be temporary and rates therefore too high for sustainable improvement in activity, particularly for smaller firms,” said Pryce.
Jessop and Ramanauskas both argued that a deterioration in the UK job market should ring alarm bells at the Bank of England.
Ruth Gregory of Capital Economics, who would vote for Bank Rate to remain at 4.25 per cent, suggested that high wage growth and a rise in oil prices should encourage rate-setter to hold off from voting to loosen policy.
“Another 25 basis point interest rate cut in August is a growing certainty,” Gregory added.
“The weakening in the jobs market is gathering pace. And it is probably only a matter of time before wage growth slows to rates consistent with the two per cent inflation target.”
Gregory also linked Chancellor Reeves’ recent spending commitments, which will see the government spend £190bn more between 2026 and 2029 than previously projected by the previous government, to the UK savings crisis, with the UK’s “savings deficiency”. The Financial Conduct Authority revealed one in ten people had no cash reserves at all while a fifth have less than £1000 to draw on for an emergency.
“A failure to [address the problem] raises the risk that higher public investment raises inflation, prompting the Bank of England to keep interest rates higher for longer, crowding out private investment.”
Before the last meeting, it was suggested that the Bank would abandon its commitment to cutting interest rates gradually.
The UK has lagged behind the eurozone by cutting rates four times in the last seven meetings, compared to the European Central Bank’s more aggressive approach of cutting rates eight times in the last two years.
Despite suggestions made by some AI models by the likes of Bloomberg that Bank officials had sounded more dovish, economists are not holding out for any real change in policy approach after Pill’s speech at Barclays calling for more moderation.
While Bailey has complained about the unpredictability of policies conducted by international governments, it is the unpredictability of some MPC members – namely Catherine Mann and Huw Pill – that will keep Bank watchers on edge this week.