The Bank of England held interest rates steady at 4.5% on Thursday, defying market expectations for a cut as inflation remains stubbornly above the 2% target. The Monetary Policy Committee voted 6-3 to keep rates unchanged, with the minority favoring a quarter-point reduction.
UK Unemployment Falls, Wage Growth Eases
Official data released earlier showed the UK unemployment rate unexpectedly fell to 4.2% in the three months to April, down from 4.3%. However, wage growth including bonuses slowed to 5.9% from 6.0%, suggesting some easing in labor market tightness.
Inflation Outlook Remains Uncertain
The Bank noted that services inflation remained elevated at 5.7% in April, well above the level consistent with the 2% target. Governor Andrew Bailey said the committee needs to see more evidence that inflationary pressures are sustainably subsiding before considering rate cuts.
Markets reacted with modest declines in UK government bonds, with the yield on the 10-year gilt rising 3 basis points to 4.12%. The pound strengthened slightly against the dollar, trading at $1.27.
Economists expressed mixed views on the decision. Ruth Gregory of Capital Economics said the hold was expected but noted that the split vote suggests a cut in August remains possible if inflation data improves. Meanwhile, Samuel Tombs of Pantheon Macroeconomics argued that the Bank is being overly cautious and risks keeping policy too tight for too long.
The next Monetary Policy Committee meeting is scheduled for August 1, when new quarterly economic forecasts will be published.
