June 20th 2024.
The city of London is buzzing with anticipation as the governing Conservative Party eagerly awaits the decision of the Bank of England on whether or not to lower its main interest rate. Despite recent news that inflation in the UK has fallen to its target rate for the first time in nearly three years, hopes of a rate cut are expected to be dashed on Thursday.
According to official figures released on Wednesday, the consumer prices index showed a drop to 2 per cent in the year to May from 2.3 per cent the month prior. This was largely due to a decrease in food prices, marking the first time since July 2021 that inflation has aligned with the bank's target. While this decline is certainly a welcome relief, it seems that some members of the bank's Monetary Policy Committee are still wary of the persistent price increases in the services sector and the rapid pace of wage growth. These concerns raise the risk of an inflation rebound if interest rates are lowered prematurely.
Luke Bartholomew, deputy chief economist at asset management firm abrdn (formerly known as Aberdeen Asset Management), explains that this is the reason why an interest rate cut tomorrow is highly unlikely. However, he believes that the Bank's upcoming communication will lay out a potential plan for a rate cut in August, which is now seeming increasingly probable.
Meanwhile, Prime Minister Rishi Sunak has made a bold move by calling for an early election on July 4, banking on the stable economic environment to work in favor of his Conservative Party. However, despite his efforts, the latest opinion polls have shown little change over the past four weeks. Many are predicting that the main opposition Labour Party, led by Keir Starmer, will return to power for the first time since 2010. It seems that the political landscape may remain unchanged despite the positive economic news.
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