Recent speculations had tipped interest rates to be slashed by the Bank of England this August. However, one of the main members presiding over the rate-setting committee at the Bank of England has cast a doubt over that possibility. With inflation not entirely ruled out, and uncertainties looming large over the economy, the BoE might just keep interest rates high. Decision to be announced on August 1.

With the previous hints from the Bank, interest rate cut in August was certainly expected of the Bank of England. However, these hopes have been dashed following a recent statement from one of the members of BoE’s rate-setting committee.

Interest rates are now stuck at 5.25%, a 16-year high, with the BoE. These high interest rates were rightly applied to prevent consumer prices from reaching higher levels; however, they also increased the cost of borrowing for everything from mortgages to consumer credit.

This past May, inflation reached the BoE’s target level of 2%, which people expected would lead to a further interest rate cut.

However, Jonathan Haskel, a member of the BoE’s monetary policy committee, said that inflation could burst above the 2% target once more. He added that rates could not be cut until there is more confidence that the forces driving inflation pressures have indeed abated.

Haskel’s term on the MPC runs until August 31. Although some members of the MPC wanted to cut borrowing costs in recent months, Haskel voted consistently for no change in interest rates.

The governor of the Bank of England reiterated that inflation has to be persistently at the target for action to take place. Wages growth in the UK is running at 6 per cent – nearly double what policymakers think is consistent with 2 per cent inflation. Services inflation also came in firmer at 5.7 per cent in May, while core – stripping out certain volatile items – came in at 3.5 per cent.

Experts warn that this is unlikely to come this summer—until most MPC members are convinced that inflation has really been conquered. Most recently, Julian Howard, investment strategist at GAM, said, ‘The BoE wants to avoid cutting rates too early, only to reverse this later.’.

For the first time, there are indications that inflation is rebounding across the world. The US Federal Reserve is slowing rate cuts. Across the channel, the European Central Bank bumped up its inflation forecasts for the remainder of the year.

The BoE expects that inflation will reach 2.5% by the end of 2024 and return to the 2% target ‘sustainably’ early in 2026. Another piece of news influencing the BoE’s decisions: this new UK government wants to make a minimum wage a “genuine living wage.” That’ll happen after an almost 10% rise in April. Goldman Sachs economists James Moberly and Sven Jari Stehn say that could prompt stronger wage growth and even prompt slower rate cuts.

The Bank of England warned in June that April’s increase to the “national living wage” could turn out higher than anticipated. The MPC will discuss new inflation data on July 17 and wage data a day later ahead of the BoE’s August meeting. The MPC will also see Clare Lombardelli join, replacing Ben Broadbent, who voted for no change in interest rates in June.

Investors, despite all uncertainties, estimate the chance of a cut to 5% at the next meeting on August 1 to be around 60%. This will be the first rate cut since the onset of the pandemic and will offer some sort of relief to the burdened homeowners facing increased costs from higher mortgages.

Some are taking a more aggressive view. One gambled £2 million that Threadneedle Street will make the biggest rate cut in four years next month. Should Threadneedle Street cut rates by half a percentage point, the trader stands to make an £8 million profit. The last time the BoE made such a deep reduction was in March 2020, early in the Covid-19 lockdown.

The Bank of England’s interest rate decision will be announced on August 1, around noon. After that, a quarterly monetary policy report and a press conference with Governor Bailey will ensue.