BoE Holds Rates at 16-Year High Despite 2% Inflation, Signals August Cut is Live

The Lead: Rate Hold Masks a Growing Divide as BoE Nears a Pivot

The Bank of England held interest rates steady at a 16-year high of 5.25% on Thursday, but a divided vote and cautious language are fueling market bets that a summer rate cut is imminent. Despite headline inflation hitting the bank's 2.0% target, stubbornly high services inflation kept the majority of policymakers on hold for now.

The Core Conflict: Headline vs. Services Inflation

According to Reuters, the Monetary Policy Committee's (MPC) 7-2 vote to maintain the Bank Rate was widely expected by economists. Policymakers Swati Dhingra and Dave Ramsden repeated their votes for a cut to 5.0%.

The decision highlights a key challenge for central banks globally. While the UK's Consumer Price Index fell to the 2.0% target in May for the first time in nearly three years, a crucial gauge of domestic price pressures—services inflation—remains hot at 5.7%. Governor Andrew Bailey said the bank needs to "see more evidence that inflation will stay low" before acting.

The BoE's own statement acknowledged the decision was "finely balanced," a clear signal to markets that the debate to cut is intensifying within the committee.

Market Reaction & Outlook: All Eyes on August

Investors looked past the hold and focused on the path forward. Financial markets are now pricing in an 85% probability of a first rate cut by the BoE in August, with two quarter-point reductions anticipated by year-end.

The immediate reaction was muted but telling:

• Sterling (GBP) dipped slightly against the dollar, trading at $1.2690.
• UK government bond (gilt) yields also declined as investors increased bets on imminent easing.

Bailey noted that the upcoming July 4 general election had no bearing on the MPC's decision, seeking to reinforce the bank's independence.

PRISM Insight: The Investor Takeaway

This wasn't a hawkish hold; it was a dovish one. The BoE is essentially running out the clock until it has enough data to justify the cut everyone sees coming. For investors, the 7-2 split is the most critical data point—it shows a committee that's methodically shifting towards easing. While the BoE's cautious stance may create some short-term volatility for sterling, the clear direction of travel firms up the timeline for a broader pivot in global monetary policy, following the ECB's lead. The August meeting is now the main event.