Volkswacht Bodensee - As election looms, BoE set to sit tight on UK rate

The BoE was widely forecast to keep its cost of borrowing at 5.25 percent, a 16-year high, following a regular monetary policy meeting.

This despite the UK annual inflation rate slowing in May to a near three-year low of 2.0 percent, matching the central bank's target.

"Despite inflation falling back to target, the BoE isn't expected to cut rates" Thursday, noted ARJ Capital analyst Manoj Ladwa.

"Given the upcoming UK general election on July 4th, traders are instead expecting the bank to cut rates in August."

- 'Political bias' -

Julian Jessop, from the Institute of Economic Affairs think tank, said the BoE would likely sit tight as UK services inflation remains well above two percent, while energy bills are set to rise towards the end of the year.

Nevertheless, the central bank "should not hesitate to cut interest rates, even during an election campaign.

"Importantly, the Bank should avoid the perception of political bias in either direction and make their decision on the basis of the better news on the inflation data," Jessop added.

Analysts argued that the inflation drop, while handing a boost to embattled Prime Minister Rishi Sunak, was unlikely to prevent his Conservatives from losing the election to the main opposition Labour party.

Keir Starmer's Labour has consistently led the Conservatives by around 20 points in opinion polls for nearly two years.

Elevated interest rates have meanwhile worsened a UK cost-of-living squeeze because they increase borrowing repayments, thereby cutting disposable incomes and crimping economic activity.

The BoE began a series of rate hikes in late 2021 to combat inflation, which rose after countries emerged from Covid lockdowns and accelerated after the invasion of Ukraine by key oil and gas producer Russia.

After peaking at 11.1 percent in October 2022, consumer price growth has cooled following a series of interest-rate hikes by the UK central bank.

Britain's economy, however, stagnated in April after emerging from recession in the first quarter of the year, as businesses and households weathered the cost-of-living crunch.

Should the BoE maintain its rate Thursday, it would mirror policy by the US Federal Reserve, which says it is not yet ready to cut, but it would contrast with the European Central Bank and other central banks that have started to reduce borrowing costs.

Central banks in Norway and Switzerland were also due to announce rate decisions Thursday. While the former was expected to keep its 4.5 percent level, the Swiss outcome was less clear after an uptick in local inflation that could prevent a further cut, according to analysts.

The Swiss National Bank in March became the first major central bank to reduce interest rates after a sustained period of hikes to combat soaring inflation.

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T.Zimmermann--VB