Bank of England holds rate steady at 16-year high days before UK elections

The Bank of England kept its main interest rate unchanged at 5.25 per cent. This is a 16-year high rate days before the UK's elections. The prospect of a future rate moved closer as policymakers agreed on the overall thinking of the committee being 'finely balanced.' But more importantly, it shows that the Bank of England will remain on the sidelines until 4th July, the day of elections.

The BOE's monetary policy committee voted 7-2 to keep rates on hold, in line with economists' expectations. The two members who voted against holding rate cuts supported a cut to 5%.

This comes as the UK's inflation returned to its 2 per cent target. Commenting on the same, Finance Minister Jeremy Hunt said, 'Well, core inflation has fallen. Food inflation is now less than 2%. For families worried about the cost of living. Today's very, very good news. And just a year and a half ago we had higher inflation than nearly anywhere in the G7. Now it is lower than nearly any other major economy. That shows that the difficult decisions we've taken have paid off.'

Despite economist expectations, many expected an early rate cut. This can be seen in the sterling falling against the US dollar after the announcement. The BOE vote follows rate-cut announcements by the European Central Bank & the Swiss National Bank. This contrasts with the US Federal Reserve's expected decision to hold on to rate cuts till September. Economists forecast the BOE to execute rate cuts a month before the Fed's expected call.

Irrespective, any rate cut would be too late for Prime Minister Rishi Sunak & the conservative party, which is desperately looking for a boost leading up to the elections.

While Sunak has credited the fall in inflation to his policy reforms since he took office in October 2022, at a time when inflation was at a 41-year high, the Opposition labour party blames the glaring cost of living crisis in the UK on high mortgage rates as a result of economic mismanagement by the ruling government. The Bank of England maintains that this decision would not impact the election outcome.