The Bank of England held interest rates on Thursday at their highest level since 2008 even as inflation in Britain slowed to 2 percent in May, an important milestone.
Policymakers kept rates at 5.25 percent, where they have been for 10 months. The officials said that high rates were working and cooling the labor market, reducing price pressures, but they added that monetary policy would need to stay restrictive until they were sure the risk of inflation overshooting their target had dissipated.
“It’s good news that inflation has returned to our 2 percent target,” Andrew Bailey, the governor of the Bank of England, said in a statement. “We need to be sure that inflation will stay low and that’s why we’ve decided to hold rates.”
As inflation has slowed around the world, central banks have been trying to determine when and to what extent they should lower interest rates. This month, the European Central Bank cut rates for the first time in about five years but warned that it would take a cautious approach to future cuts. The U.S. Federal Reserve also indicated it would reduce rates just once this year, down from an earlier projection of three cuts.
Bank of England officials remain divided on the timing of rate cuts. A majority of policymakers voted to leave rates at their high levels even though data published on Wednesday showed that the annual inflation rate had slowed in May to 2 percent, the central bank’s target. Two members of the nine-person rate setting committee voted again to lower rates by a quarter-point.
But the overriding message from the central bank has been that inflation has to stay at the 2 percent target sustainably. There are still signs of lingering inflation persistence that could keep price growth stubbornly high. For example, inflation in the services sector was 5.7 percent in May, which was notably stronger than the central bank’s forecast of 5.3 percent.
There were also signs that wage growth would not ease in the coming months as much as the bank had forecast, according to the minutes of this week’s policy meeting.
Policymakers have been scrutinizing wage data and services inflation, which are heavily influenced by labor costs and tend to be the most stubborn forms of inflation. They risk creating a spiral of higher pay, which companies pass on to consumers in the form on higher prices, which then leads to demands for higher pay. British officials have said they do not see evidence of a price-wage spiral, but they have raised concern that price pressures would be strong enough to keep inflation above the 2 percent target for too long.
Inflation is also expected to climb again in the second half of this year because energy prices, which have stabilized, will no longer pull down the overall inflation rate.
Still, the prospect of an imminent rate cut remained on the table. The central bank forecast last month that inflation would sustainably return to the 2 percent target — and potentially go lower — in the second quarter of 2026. With the target in sight, the bank firmly opened the door to rate cuts.
But just a couple of weeks after that forecast, Rishi Sunak, Britain’s prime minister, announced a general election in early July. Investors quickly dropped all bets that the Bank of England would lower rates this week in case the move was interpreted as being politically motivated.
Policymakers continued to keep the door open to rate cuts later this summer. Several members of the committee who voted this week to hold rates steady argued that their decision was “finely balanced,” according to the minutes, suggesting that barring major surprises, they could switch their vote to a cut. The next policy meeting is in early August.