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BoE keeps interest rates stable in the run-up to the British elections

The BoE is widely expected to maintain interest rates at 5.25% to avoid any perception of political interference ahead of Britain’s July 4 general election. Prime Minister Rishi Sunak’s unexpected call for early elections is seen by some as an indirect extra boost for the BoE. time to monitor inflation trends and reassess the economic outlook. A more comprehensive decision is expected in August, when updated economic forecasts will be available.

The inflation data for May strengthens the case for a cautious, wait-and-see approach. Headline inflation has finally returned to the BoE’s target of 2% for the first time in almost three years, a positive development. However, services inflation remains stubbornly high at 5.7%, indicating that underlying inflationary pressures still need to be addressed.

Reflecting this development, money markets have adjusted their expectations, now pricing in only a 30% chance of a rate cut in August, down from 45% earlier this week. A quarter-point cut is still fully priced in for this year, likely by November, with a 60% chance of a second cut, up from 80% earlier this week.

On the currency markets, the EUR/GBP rate fell to a standstill after reaching 0.8396 last week. But the near-term outlook will remain bearish as long as the 0.8482 support holds. Any aggressive hint from the BoE today could resume the downtrend via a 100% projection from 0.8764 to 0.8497, from 0.8643 to 0.8376.

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