The Bank of England yesterday paved the way for a summer interest rate cut after inflation fell to its 2 percent target.
Members of the Monetary Policy Committee (MPC) voted seven to two in favor of leaving interest rates at 5.25 percent.
But the Bank revealed that although it chose to keep the base rate at its highest level in 16 years, it was a risky decision.
The announcement will revive hopes that the Bank could vote in favor of a cut in early August, easing pressure on millions of borrowers.
It is expected to give an immediate boost to the new Labor government if it wins the July 4 general election.
Andrew Bailey, governor of the Bank of England, said it was “good news” that inflation had returned to our 2 per cent target.
The announcement will revive hopes that the Bank could vote in favor of a cut in early August, easing pressure on millions of borrowers (Bank of England file image).
Julian Jessop, an economics fellow at the Institute of Economic Affairs, said the Bank was “wrong” to leave rates unchanged.
“There is already a lot of evidence that underlying cost pressures are easing,” he added. ‘The longer the Bank waits, the greater the risk that inflation will miss the target and unnecessarily slow the recovery.
“The MPC might have wanted to avoid the perception of bias if it had surprised investors by cutting rates so close to the election.”
Inflation has fallen to 2 percent for the first time in almost three years.
Andrew Bailey, Governor of the Bank of England, said: “It is good news that inflation has returned to our target of 2 per cent. We need to be sure that inflation will remain low and that is why we have decided to keep rates at 5 per cent. .25 percent for now.’
The Bank added: “As part of the August forecasting round, committee members will consider all available information and how this affects the assessment that the risks of persistent inflation are declining.”
The language is likely to cheer markets after traders were pessimistic about the prospect of a summer rate cut because service sector inflation came in at a higher-than-expected 5.7 percent.
The MPC downplayed the figure, saying it was due to prices that rise regularly at that time of year, such as mobile phone contracts, broadband and water bills.
Another factor being closely watched is wage growth, which stands at 6 percent. However, some MPC members also downplayed that figure.
The Bank said that for some rate setters the higher-than-expected services inflation reading “did not significantly alter the disinflationary path the economy was on.”
And they noted that the strength of wage growth was driven by an increase in the national living wage, something that was “unlikely to be as large in the future.”
He added: “For these members, the political decision at this meeting was finely balanced.”
It is expected to give an immediate boost to the new Labor government if it wins the general election on July 4 (Bank of England file image)
The minutes imply that the MPC could easily be inclined to vote for a cut later this summer.
But they suggest a decision may be close, and are increasing pressure on new deputy governor Clare Lombardelli, who will join the Bank early next month.
The minutes also increase optimism about Britain’s economic recovery.
After better-than-expected GDP growth of 0.6 percent in the first quarter, the Bank has raised its forecast for the second quarter from 0.2 percent to 0.5 percent.