Bank of England set to bury Sunak's pre-election rate cut hopes

By William Schomberg

LONDON (Reuters) - Any lingering hopes Prime Minister Rishi Sunak might still have for a pre-election interest rate cut will probably be dashed next week, when the Bank of England looks set to signal that lower borrowing costs await Britain's next government instead.

The BoE has been inching towards a first reduction in rates since the start of the coronavirus pandemic more than four years ago, encouraging Sunak to tell voters still feeling the effects of the cost-of-living squeeze that a turning point is coming.

Unfortunately for Sunak and his struggling Conservative Party, Britain's inflation pressures still appear too hot for the BoE to cut rates at its June 20 meeting - the last before the election - and join other central banks that have done so.

A Reuters poll published on Wednesday showed 63 of 65 economists thought a first cut would not come until Aug. 1. Most also expected another reduction before the end of the year.

Two analysts expect the first move by the BoE to come in September. None saw a cut on Thursday, after the BoE's June meeting.

"They can afford to wait," Peter Dixon, head of EMEA country research with Fitch Solutions, said. "The ECB has acted but globally the environment suggests the Bank can wait a little longer. Six weeks isn't going to hurt."

On Wednesday, the U.S. Federal Reserve pushed out the start of its rate cuts to possibly as late as December.

The approach of Britain's July 4 election has prevented BoE policymakers from dropping fresh hints about what they are likely to do next week.

Governor Andrew Bailey and his colleagues cancelled all public events when Sunak called the election on May 22.

INFLATION PRESSURES

Cutting borrowing costs in the run-up to the ballot might be seen as politically risky but it would not be without precedent: in May 2001 the BoE did so less than a month before voters went to the polls, part of a string of rate cuts that year.

However, recent economic data suggests the BoE will not be facing a pre-election dilemma next week.

While headline inflation has tumbled to close to the BoE's 2% target, it was much higher than expected in the key services sector in April, and 6% wage growth in May remained roughly double the level consistent with the target.

Inflation data for May, which is due next Wednesday, only a day before the BoE announces its rates, is unlikely to significantly alter the picture.

Only two of the Monetary Policy Committee's nine members voted for a rate cut at their last meeting in May. Bailey - among the seven-strong majority who backed no change - said at the time that a change in policy in June was "neither ruled out nor a fait accompli".

But that was before April's strong inflation figures.

Furthermore, Britain's economy started 2024 on a stronger footing than in the second half of 2023 when it went into a shallow recession, weakening the case for urgent support.

Analysts at Nomura said they expected another 7-2 vote in favour of keeping Bank Rate at its 16-year high of 5.25% next week but saw a chance that Deputy Governor Dave Ramsden might rejoin the majority in an 8-1 decision against a cut.

Unlike in past elections, the outcome of the July 4 vote does not seem to have major immediate implications for the BoE.

The main opposition Labour Party, which is way ahead in the polls, on Thursday set out its policy manifesto with a promise to stick to budget rules similar to those of the Conservatives and maintain the BoE's 2% inflation target.

"Nothing is going to frighten the horses in the short term," Dixon said. "I think it would be a relatively smooth handover from a monetary perspective."

(Writing by William Schomberg; editing by Mark Heinrich)