Chart of the Week: UK holds rates despite hitting inflation target

The Bank of England decided to maintain its key policy rate at 5.25% at its June meeting, despite data from the Office for National Statistics (ONS) showing that headline inflation fell to the Bank’s 2% target in May, from 2.3% in the previous month. This marks the first time in almost three years that UK inflation has not exceeded its target. The decline in headline inflation was in line with forecasts by economists polled by Reuters, and means that headline inflation is now lower in the UK than in either the US or the Eurozone. However, core inflation, which excludes food and energy, remains elevated, at 3.5%. Additionally, services inflation was 5.7% in May –  higher than the Reuters poll forecast of 5.5%, which suggests that underlying inflationary pressures persist in the economy. Stickiness in services inflation and ongoing wage pressures were among the reasons that we attached a 60% weight that the UK transitions into a ‘higher for longer’ scenario, in which Bank Rate is on hold until the turn of the year before falling gradually towards a new, higher equilibrium. This scenario was described in Fathom’s Global Outlook, Summer 2024 – charts and analysis from this forecast will be available soon via Chartbook. While higher rates could help boost UK productivity in the long run by shaking out unproductive firms, the Bank of England’s latest decision will be less welcome news to Prime Minister Rishi Sunak as voters prepare to head to the polls on 4 July.

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The views expressed in this article are the views of the author, not necessarily those of LSEG.

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