Bank of England expected to leave interest rates on hold despite inflation falling – business live | Business

Dutch bank ING has predicted that the first UK rate cut will come in August, with a total of three cuts this year.

But having said that, of ING developed market economist, James Smith, suggests that markets may be discounting the chances of a rate cut today.

He explains:

Investors believe the bank is unlikely to cut interest rates in an election campaign. We wouldn’t be so sure about that.

We don’t expect a rate cut, but markets are underestimating the chances.

The good news for the bank is that the rate cut issue has avoided being politicized in the way it could become in the US presidential election campaign later this year, even if other areas of BoE policy (related to remuneration of reserves) are subject to verification.

Our conclusion from the last meeting in May was that the June decision would be on a knife’s edge, and that calculation probably hasn’t changed as much as markets might think. We felt that Gov. Andrew Bailey sounded like he would have voted to cut rates in May if his committee had been more on board with it. However, our main case is a break this month.

Good morning and welcome to our ongoing coverage of business, financial markets and the global economy.

Rishi Sunak’s hopes for a pre-election rate cut are likely to be dashed today in one of the most sensitive monetary policy decisions in years.

The Bank of England will set interest rates at midday and is expected to leave them on hold at 5.25%, a 16-year high.

Yesterday’s decline in inflationback to the BoE’s 2% target, gives the Monetary Policy Committee (MPC) good reason to consider cutting rates to ease some of the pressure on borrowers.

However, policymakers have grimly noted that inflation in the services sector is much hotter, with prices rising by 5.7% over the past 12 months.

Sanjay Raja, Deutsche of the bank the UK’s chief economist, says:

While calls for an impending rate cut will grow given the core CPI fell to 2%, there are likely to be growing concerns about volatility around services inflation.

There may not be unanimity on today’s decision. At the last meetingin May, two members of the MPC voted to cut rates, but were outnumbered by their seven peers who voted for no change.

City economists expect another 7-2 split today, with matchmaker Dhinga and deputy regional governor Dave Ramsden is expected to push for a rate cut again.

The minutes of this week’s meeting will also be released at midday, giving insight into the bank’s views on the health of the economy and the outlook for growth and inflation.

Conservatives may be disappointed if the Bank leaves interest rates on hold again today, as some – like former cabinet minister Sir Jacob Rees-Mogg – are calling for a rate cut this year.

A rate cut would likely support Sunak’s claims that the economy has turned the corner.

But the bank is likely to be concerned that inflationary pressures may still be lurking in the economy.

Ipek Ozkardeskayasenior analyst in swissquote bankexplains:

First, services inflation remains high – perhaps too high near 6% – to allow the BoE to cut rates with confidence, as services make up around 80% of the UK economy.

And second, consumer prices could quickly rebound if the natural gas market tightens as traders rush to replenish stocks ahead of winter.

Thus, if the BoE doesn’t announce a rate cut today, it won’t be because they don’t want to poke their nose into the country’s political affairs with the upcoming general election, but mostly because core inflationary drivers are still not convincing enough to to allow them to do so.

The day is busy for central bank news, with Switzerland and Norway also setting interest rates

The agenda

• 7am BST: European car sales for May

• 8.30am BST: Swiss National Bank interest rate decision

• 9am BST: Norwegian interest rate decision

• Noon BST: Bank of England interest rate decision

• 13:30 BST: US housing starts in May

• 13.30 BST: Weekly US unemployment data