Bank of England’s latest decision on base rate

The Bank of England’s Monetary Policy Committee (MPC) voted by a majority (7-2) to maintain the base rate at 5.25% at its May meeting.

Two members of the committee voted for the rate to be decreased to 5%.

In setting out the context to the vote, the MPC said: ‘Monetary policy will need to remain restrictive for sufficiently long to return inflation to the 2% target sustainably in the medium term in line with the MPC’s remit. The Committee has judged since last autumn that monetary policy needs to be restrictive for an extended period of time until the risk of inflation becoming embedded above the 2% target dissipates.’

The committee cited a continued decline in construction activity, albeit at an easing rate, in its consideration, and particularly the subdued housing market.

Bank of England agents – who provide feedback on economic conditions and prospects across the UK ahead of voting – reported expectations of modest growth returning later in the year but highlighted a pick-up in mortgage approvals and new buyer enquiries and instructions to sell figures as indicative of recent increased activity.

The committee said: ‘Private house building remains markedly weak but with signs of bottoming out. Budget constraints continue to slow new public sector, social housing and infrastructure work. And commercial development continues to fall modestly, constrained by difficulty in accessing funding at a viable rate.

‘Contacts are more optimistic that growth in demand for construction will return around the autumn, as stabilising material and labour costs lead to more certain returns on investment and in anticipation of lower funding rates.’

Dr David Crosthwaite, Chief Economist at BCIS, said: ‘From a construction perspective, the Bank of England’s decision to maintain again is puzzling as it will continue to frustrate activity in the industry.

‘The cost of borrowing plays a key role in both residential and commercial construction. As long as rates remain relatively high, we don’t expect new work output to recover any time soon.’

The committee also acknowledged the continued upside risk to near-term inflation from geopolitical factors, though said developments in the Middle East have had a limited impact on oil prices so far.

The MPC will next meet on 20 June 2024.

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