The Bank of England keeps interest rates steady, despite slowing inflation

The Bank of England on Thursday kept interest rates at their highest level since 2008 even as inflation in Britain slowed to 2% in May, an important milestone.

Policymakers kept interest rates at 5.25 percent, where they were 10 months ago. Officials said higher interest rates were cooling the labor market, reducing price pressures, but added that monetary policy should remain tight until they were sure the risk of inflation exceeding their target had dissipated.

“It is good news that inflation has returned to our 2% target,” Andrew Bailey, Governor of the Bank of England, said in a statement. “We need to make sure that inflation stays low, which is why we decided to maintain interest rates.”

As inflation slows around the world, central banks are trying to determine when and by how much they should cut interest rates. This month, the European Central Bank cut interest rates for the first time in about five years, but warned that it would take a cautious approach to future cuts. The US Federal Reserve also indicated that it would cut interest rates only once this year, down from a previous forecast of three cuts.

Bank of England officials remain divided on the timing of interest rate cuts. A majority of policymakers voted to leave interest rates at their high levels even though data published on Wednesday showed that the annual inflation rate slowed in May to 2 percent, which is the central bank's target. Two members of the nine-person rate-setting committee again voted to lower rates by a quarter of a percentage point.

But the overriding message from the central bank was that inflation should remain at the 2% target sustainably. There are still signs of persistent inflation, which may keep price growth stubbornly high. For example, service sector inflation reached 5.7% in May, which was significantly stronger than the central bank's forecast of 5.3%.

There were also signs that wage growth would not decline in the coming months as much as the bank had expected, according to minutes from this week's policy meeting.

Policymakers have been scrutinizing data on wages and services inflation, which are heavily influenced by labor costs and tend to be the most stubborn forms of inflation. They risk creating a spiral of higher wages, which companies pass on to consumers in the form of higher prices, which then lead to demands for higher wages. British officials said they saw no evidence of a downward spiral in prices and wages, but raised concerns that price pressures would be strong enough to keep inflation above the 2 percent target for a long time.

Inflation is also expected to rise again in the second half of this year because energy prices, which have stabilized, will not reduce the overall inflation rate.

However, the prospect of an imminent rate cut remains on the table. The central bank predicted last month that inflation would sustainably return to the 2 percent target — and possibly decline — in the second quarter of 2026. With the target in sight, the bank aggressively opened the door to lower interest rates.

But just two weeks after those predictions, Rishi Sunak, the British Prime Minister, announced a general election in early July. Investors quickly abandoned all bets that the Bank of England would cut interest rates this week in case the move was interpreted as politically motivated.

Policymakers continued to keep the door open for interest rate cuts later this summer. Several committee members who voted this week to keep interest rates steady said their decision was “well balanced,” according to meeting minutes, suggesting that barring major surprises, they could shift their vote to a cut. The next policy meeting is scheduled for early August.

“The committee is clearly approaching the point of cutting interest rates,” ING economists wrote in a note to clients. “Assuming the next inflation report in mid-July contains no bad surprises, we still believe the bank will vote in favor of a rate cut in August.”