Bank of England 'paves way for August interest rate cut' after inflicting blow on Rishi Sunak by holding level at 5.25% until after election - despite inflation falling to target

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The Bank of England paved the way for an August interest rate cut today as it kept the level on hold at 5.25 per cent. 

The Monetary Policy Committee (MPC) voted 7-2 to maintain the pause until after the election, despite inflation falling back to its 2 per cent target. 

The decision had been widely expected, but is still a blow to Rishi Sunak as he struggles to avert a Tory meltdown. 

The PM hailed inflation returning to the target for the first time in three years, insisting that it showed the economy has 'turned the corner'.

Markets are now pricing in the likelihood of the first rate cut coming in August.

Although the margin was the same as at the last MPC meeting, minutes showed that other members felt the choice was 'finely balanced' and suggested services inflation was less of a problem.

Capital Economics said the Bank 'continued to give the impression that the pieces of the puzzle are almost in place for it to cut rates'. 

'This lends some support to our view that the Bank will first cut rates at the next meeting in August,' a spokesman said. 

Matthew Ryan of financial services firm Ebury said: 'The Bank of England subtly laid the groundwork for a summer UK rate cut today, without going so far as to firmly commit to one.

'The notion that additional committee members are now considering voting for lower UK rates provides another clear signal to markets that cuts are in the offing in the not too distant future.'

Chancellor Jeremy Hunt said on Wednesday that he was hoping mortgage costs would start to come down soon.

The Bank's governor, Andrew Bailey, said policymakers 'need to be sure that inflation will stay low and that's why we've decided to hold rates at 5.25 per cent fo

The Bank's governor, Andrew Bailey, said policymakers 'need to be sure that inflation will stay low and that's why we've decided to hold rates at 5.25 per cent for now'. 

The decision comes a day after official figures showed the rate of inflation hit the Bank's 2 per cent target in May for the first time in nearly three years, prompting the Prime Minister to declare 'we've got there' after the milestone was reached.

However, some policymakers on the Bank's nine-person Monetary Policy Committee (MPC) felt that 'more evidence of diminishing inflation persistence was needed' before they could safely cut rates.

In particular, they felt that services inflation - which looks only at service-related prices such as hospitality and culture - had remained stubborn, and wage growth was rising faster than forecast.

But two members of the committee - Swati Dhingra and Dave Ramsden - voted for a reduction again as they argued that inflation looks set to remain at normal levels.

Furthermore, a summary of the MPC's meeting revealed that, for other members, the policy decision was 'finely balanced' because they felt services inflation was putting less pressure on the overall rate.

It indicates that the policymakers were somewhat split on the economic data.

'As part of the August forecast round, members of the committee will consider all the information available and how this affects the assessment that the risks of inflation persistence are receding,' the MPC summary read.

Meanwhile, the latest decision comes two weeks before the UK holds its General Election, but policymakers stressed that the timing of the election was 'not relevant to its decision' on rates.

Chancellor Jeremy Hunt said on Wednesday that he was hoping mortgage costs would start to come down soon.

This morning he told the Times CEO Summit he did not think there had been 'sustained economic scarring' from Liz Truss's 2022 mini-budget. 

Mr Hunt was appointed Chancellor by then-prime minister Ms Truss following the dismissal of Kwasi Kwarteng in the wake of the mini-budget that shocked the UK economy.

The Chancellor, who described his first week in the Exchequer as the 'most dramatic' of his life, said it is not 'fair' to claim there is 'sustained economic scarring' from Ms Truss's time in No. 10.

He said: 'It was one of the - well it was the most - dramatic week in my life in terms of decisions I had to take when I got that rather unexpected call from Liz Truss asking me to be Chancellor.

'Which I thought was a hoax and refused to take the call and could not imagine any situation ever where Liz Truss would actually ask me to be Chancellor, so that was a bit surreal, and then in that first week literally I'm picking the entire mini-budget.

'But I don't think it's fair to say that there was a sustained economic scarring from that. I think if you look at us now with lower inflation, higher growth than most major economies we're actually doing very well.'

Liberal Democrat Treasury spokeswoman Sarah Olney said: 'Today's decision means there is no end in sight for mortgage misery, with families hit with rocketing payments after the Conservatives crashed the British economy.

'Families have had their hopes of a rate cut dashed once more, leaving them to cope with unbearable mortgage payments for months to come.