The Monetary Policy Committee (MPC) of the Bank of England (BoE) has kept interest rates on hold at its July meeting as it waits for a clearer sense of how much the U.S.-Iran war will push up UK inflation, although the collapse of a tentative truce prompted a third policymaker to back a rate hike. The MPC voted 6-3 to keep the Bank Rate at 3.75% rather than the 7-2 split most analysts had expected. BoE Governor Andrew Bailey said (in a video clip posted online after the decision) that cutting interest rates remained unlikely this year. The BoE expect inflation to rise to 3.2% later this year and then to stay above target until early 2028, before dipping below 2.0%.
This is consistent with the consensus view of the latest monthly Reuters poll of economists who predicted correctly that the Bank of England (BoE) would not shift its key interest rate from 3.75% in July – and likely not for another year – as UK inflation is expected to remain firmly above the central bank’s 2.0% target. According to median estimates in the latest Reuters poll, the first 25-basis-point drop will not come until at least July next year and will be followed by another in the fourth quarter of the year. Poll respondents also predicted that UK inflation would peak at 3.3% next quarter before moderating but will not fall back to the BOE’s target of 2.0% until the end of 2027.
The Bank of England (BoE) has set out plans to relax rules on how much capital banks have to hold against shocks, which is intended to align requirements for UK banks more closely with international standards as regulators globally come under pressure to revisit requirements aimed at shoring up resilience. The BoE’s Financial Policy Committee (FPC) has said it would soften the impact of the regulated Leverage Ratio, which requires lenders to hold a minimum ratio of capital against total assets and has announced work to enhance the usability of capital buffers so that they can be more easily released without automatically restricting payouts to shareholders.
The UK Government has designated cloud service providers Amazon, Google, Microsoft and Oracle as critical third-party suppliers to the UK financial services sector that will bring them under direct regulatory oversight. The move is aimed at strengthening the resilience of financial firms by reducing the risk of widespread disruption from cyber-attacks or technology outages. The UK Government believes that as banks, insurers and financial market infrastructures become increasingly reliant on cloud services, disruption at a major supplier could affect multiple firms at the same time, potentially impacting crucial services to customers.
The Bank for International Settlements (BIS) has warned that the artificial intelligence (AI) boom could make it significantly harder for central banks to judge the state of their economies and to set interest rates as the technology simultaneously boosts both supply and demand. The BIS has said that policymakers face an unusually difficult task as AI generates powerful investment, trade and financial-market effects long before any broad-based productivity gains are fully visible. The challenge for policymakers is that the size, timing and distribution of those gains remain highly uncertain. The BIS believes that, by simultaneously affecting demand and supply, AI blurs cyclical signals that could complicate central banks’ assessment of underlying economic conditions and the calibration of monetary policy.
It is understood that Metro Bank plc is at the early stages of exploring a formal offer of circa £2.0 billion to acquire Aldermore Group plc and is among several parties – including Lloyds Banking Group and Shawbrook Group plc – that are mulling over an offer for the UK-based mortgage and business lender. In April, its South African owner (FirstRand Limited), a South Africa-domiciled financial services provider, said it intends to exit the UK after costly potential redress payouts – tied to the UK motor finance mis-selling scandal – forced the Group to hike provisions to £750m.
During the month, S&P reaffirmed the long-term credit ratings for Commerzbank AG and lowered the outlook to “Stable” to reflect agency expectations that the Bank will maintain its solid creditworthiness under a likely scenario of majority ownership and control by the Italian bank, UniCredit SpA, in the next two years, as well as recognising its current sizeable resolution buffer.