UK interest rates left unchanged at 5.25%

Path set for August easing but market concerns over Labour government spending may pressure sterling and ‘import’ inflation

20 June 2024

The Bank of England left interest rates unchanged today at 5.25%, but the path appears increasingly clear for some easing at the August meeting. The reason for this is that inflation has come right down to the target level of 2%, unlike in the US and - to an extent - Europe. In particular, the UK's energy bills are easing and although its unique bill capping regime has seen lumpier price movements, actual realised prices for consumers are finally normalising.

Some risks remain, however. The UK is in the middle of an election campaign and a potential Labour landslide could unsettle markets, in particular the currency. Sir Keir Starmer has come under particular pressure in recent days on the issue of tax and spending. Sterling will appreciate neither unfunded spending, nor a heavier tax burden. The lack of reassurance from Labour on principal residence CGT and adjustments to council tax bands will leave many suspicious that a significant victory on 4 July will lead to a bolder and more progressive tax regime that could hurt economic growth and free enterprise.

The UK's currency will be sensitive to this and as a large open economy a reversal from the recent stabilisation of cable (now back up to USD 1.27) could have the effect of 'importing' inflation and undoing the good work of softer energy prices. So while the headline rate of inflation may have encouragingly sunk to 2%, the Bank will be keen to avoid a policy error in which it cuts rates but then have to hold fire or, worse, outright reverse the easing due to forces beyond its control.