Inflation hits 2% target, but base rate continues to hold

The Bank of England’s (BoE) Monetary Policy Committee (MPC) has kept the base rate steady at 5.25%, despite inflation falling to the 2% target in May. The lowest level since July 2021.

This marks the seventh consecutive time the BoE has held the rate unchanged since it paused its series of rate hikes in September 2023. Previously, the base rate had climbed 14 times straight since December 2021, in an effort to tackle stubborn inflation.

The MPC’s decision wasn’t unanimous. The nine-member committee was split, with two members (Swati Dhingra and Dave Ramsden) advocating for a decrease to 5%. They believe a reduction is necessary to ‘enable a smooth and gradual transition in the policy stance’. This division signals that rate cuts could be just around the corner. A Reuters poll of economists published last week predicts movement as early as August.

Governor Andrew Bailey said: “We need to be sure that inflation will stay low and that's why we've decided to hold rates at 5.25% for now.”

Inflation remains a concern

‘Inflation’ is the term used to describe the rising price of goods and services. How quickly prices go up is called the ‘inflation rate’.

Despite headline inflation hitting its 2% target, this wasn’t enough to sway the BoE to make an immediate cut. Other measures of inflation are factored in when deciding whether to change the base rate, some of which are currently higher than the BoE’s target.

Services inflation, which includes the travel and the hospitality sector, has been slower to retreat. The latest figures from the Office for National Statistics showed that services inflation dropped to 5.7% in May, down from 5.9% in April.

Core inflation, which excludes food and energy costs, also remains sticky. It fell to 3.5% in May, down from 3.9% the previous month. Both of these are still well above the BoE’s sustainable 2% target.

Read more: Understanding inflation, the base rate, and GDP

Political considerations

The upcoming General Election on 4 July has likely influenced the MPC’s latest decision to hold. The BoE maintains political neutrality. So it’s no surprise that they chose to await the election results before making any significant rate changes.

By the time the MPC next meets in August, a new government could be in place, potentially changing economic policies and forecasts.

Learn more: How the General Election could affect your wealth

Savers are in a sweet spot

For savers, the current environment remains favourable. With inflation at 2% and interest rates for savings accounts hovering around 5%, you can still secure returns that outpace inflation.

But with anticipated rate cuts on the horizon, this savings sweet spot might not last. Now is an opportune time to take advantage of attractive rates. New data from the Flagstone Base Rate Poll found that Financial Advisers are telling their clients to lock in longer-term savings and hold more of their wealth in cash.

If you’re looking for a simple way to manage and grow your cash for maximum returns, our cash-deposit platform offers the solution. With a single login, unlock access to hundreds of accounts from 60+ banks, including exclusive interest rates.

See how much you could earn on your savings with Flagstone’s cash deposit calculator.

When will the base rate go down?

Economists predict the BoE will lower the base rate at the MPC meeting on Thursday 1 August. This coincides with the release of the quarterly Monetary Policy report and press conference.
Data from our poll shows that:

• Just over half of banks and advisers (53%) predict the base rate will end the year at 4.5%.
• Almost a quarter (24%) expect the base rate to be more than 4.5%.
• The remaining 22% forecast it being even lower than 4.5%.

With inflation easing and political changes ahead, all eyes will be on the August meeting.

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