BoE keeps rates at 5.25pc ahead of UK election

LONDON, June 20 (Reuters): The Bank of England (BoE) kept its main interest rate unchanged at a 16-year high of 5.25% on Thursday ahead of a July 4 election, but some policymakers said their decision not to cut rates was now "finely balanced".

The BoE's Monetary Policy Committee voted 7-2 to keep rates on hold, in line with economists' expectations in a Reuters poll. Deputy Governor Dave Ramsden and external MPC member Swati Dhingra remained the only policymakers to support a cut to 5 per cent.

BoE Governor Andrew Bailey said in a statement alongside the decision that it was "good news" that the latest data had shown inflation was back at its 2 per cent target, but that it was too soon to cut rates.

"We 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," he said.

Bailey's statement differed from last month, when he said he was "optimistic" that data was moving in the right direction for a rate cut.

Sterling fell against the U.S. dollar after the announcement and British government bond prices dropped as investors saw a greater chance of an early rate cut. Markets priced in an 88 per cent chance of a first quarter-point cut by September's meeting, up from 74 per cent before Thursday's decision.

The BoE vote follows a long-trailed decision by the European Central Bank earlier this month to start to cut rates, while financial markets do not expect the U.S. Federal Reserve to lower borrowing costs until late this year.

A Reuters poll of economists published last week showed most expected a rate cut on Aug. 1 after the BoE's next rate decision.

RISING INFLATION

The BoE expects inflation to rise above target as the effect of past energy price falls drops out of annual inflation data, and repeated its May forecast for inflation to be around 2.5% in the second half of 2024.

In a sign the central bank may be getting closer to cutting rates, the BoE policy minutes said the decision to keep rates on hold had been "finely balanced" for some MPC members.

The BoE said indicators of inflation persistence - chiefly wage growth and services inflation - had moderated since its May meeting but remained high.

The MPC members whose views on a rate cut were "finely balanced" placed less weight on higher-than-expected May services inflation than others.

Since the start of the election campaign the BoE has been in a self-imposed period of silence, cancelling public events.