Despite inflation hitting the 2% target, the Monetary Policy Committee (MPC) voted 7-2 to keep rates at a 16-year high, citing the need to ensure sustained low inflation. However, a reduction as early as August was hinted at by Governor Andrew Bailey.

Two members dissented, favouring an immediate cut. Sterling weakened slightly following the announcement, with markets pricing in a higher chance of an August rate cut.

Peter Arnold, EY UK chief economist, said: “Successive significant overshoots for services inflation – one of the MPC’s key measures of inflation persistence – had removed any likelihood of interest rates being cut today. So, the focus was really on any messaging around future rate cuts.

“By reporting that, for some members, June’s decision was ‘finely balanced’, the MPC sent a clear signal that August’s meeting is live, and that a rate cut is on the cards if data published over the next six weeks is supportive.

“This suggests some committee members are increasingly placing less weight on backward-looking measures of inflation persistence – such as services inflation – and more emphasis on how inflation is likely to evolve in the future. In particular, these members seem to see a much smaller risk of inflation expectations staying elevated now that headline inflation has returned to the Bank of England’s target.

“The EY ITEM Club forecasts that Bank Rate will be cut by 25bps in August and another 25bps in November, meaning bank rate ends this year at 4.75%.”