【MACRO Insight】The UK Conservative Party is facing a political crisis due to the upcoming election, with market expectations holding the benchmark interest rate steady at 5.25%.

British Prime Minister Rishi Sunak, the first Prime Minister of Indian descent in history, is currently facing the awkward prospect of becoming the first sitting Prime Minister to lose his seat in a general election. According to analyses by Savanta and Electoral Calculus for The Daily Telegraph, the Conservative Party may only secure 53 seats in next month's election, marking its worst performance in history. YouGov's predictions suggest that the Labour Party could win 425 seats in the election on July 4th, while the Conservative Party might only secure 108 seats. The Liberal Democrats could potentially increase their seats from 11 to 50, emerging as a major opposition force.

The political consultancy firm More in Common's survey further predicts that Conservative parliamentary seats could decrease to 155, which is 10 seats fewer than the record loss to Labour in 1997. Prime Minister Sunak himself may also lose his seat in Richmond and Northallerton, an unprecedented situation for a sitting Prime Minister. Chancellor of the Exchequer Jeremy Hunt and Defense Secretary Grant Shapps are also at risk of losing in the election.

Sunak has been campaigning in constituencies where the Conservative Party won a majority in 2019, but senior party figures warn that Labour must be prevented from gaining a “super majority.” In a video released by Labour, wealthy businessman John Calder, who was once a lifelong Conservative supporter and donated £500,000, announced he will vote Labour in this election. Calder, deeply disappointed by the Conservatives' recent performance, feels there's nowhere else he can cast his vote. He met with Labour leader Keir Starmer and praised him for being “genuinely impressed on many issues.” Calder described Sunak as “absolutely useless,” a critique undoubtedly casting a shadow over Sunak's political future.

With Prime Minister Sunak announcing the election just three weeks later, the Bank of England is set to announce its rate decision and meeting minutes, leading markets to widely expect the Bank to keep the benchmark interest rate unchanged at 5.25%, its highest level in 16 years. Latest inflation data shows UK's May inflation rate dropping to the 2% target, but with continued high service sector price increases. Ahead of the election, Bank officials remain silent to avoid political interference, leaving markets with little insight into the Bank's interpretations and future actions.

Members of the Monetary Policy Committee (MPC), including Bank of England Governor Andrew Bailey, are expected to adopt a more cautious stance at Thursday's meeting. The MPC emphasizes its political independence and has stated its willingness to cut rates if necessary. In May, the MPC voted 7-2 to keep rates unchanged, with Deputy Governor Ben Broadbent and member Silvana Tenreyro supporting a 25 basis point cut. The market expects this decision to be repeated, as there have been no speeches by Bank officials to provide any other guidance during the campaign period.

This will be the last meeting for Deputy Governor Broadbent, and the market expects his successor, Clare Boustead-Bate, to take a more hawkish stance. The Bank of England abandoned its inclination to hike rates in February and suggested it might consider a cut if the data allowed. Bailey and Chief Economist Huw Pill have described the current rates as “restrictive” and have hinted that even after an initial rate cut, rates would remain so.

Bank officials are closely watching wage growth and prices in the services sector for signs that inflation will remain at the 2% target. Citigroup Chief UK Economist Benjamin Nabarro expects the policy summary to reiterate a weak inclination towards a rate cut, while continuing to rely on data, and believes the main question is how much of a signal of a rate cut the MPC will send in August. If services inflation data again comes in stronger than expected, it could unsettle the Bank of England and may make it cautious about the pace of monetary easing this year.

However, investors no longer anticipate a substantial rate cut from the Bank of England this year, with traders expecting only one rate cut, compared to six at the beginning of the year. They believe there is a two-thirds chance of a rate cut in September, with economists also suggesting the possibility in August. George Buckley, European economist at Nomura Securities, noted a hawkish tilt in data since the last meeting, reflected in the market's expectation of a smaller rate cut in 2024. The Bank of England will release new forecasts in August, but may comment on stronger-than-expected core inflation since the last meeting.

In fact, after growing by 0.6% in the first quarter, the UK economy stagnated in April. The Bank had previously forecast a 0.2% growth in the second quarter, and saw improved economic prospects for 2025 and beyond, partly due to rate cuts. The Bank is reducing its government bond holdings accumulated over more than a decade of quantitative easing at a pace of around £100 billion annually through bond sales and not renewing maturing bonds. It will evaluate the pace of its QE exit in September, but policymakers are unlikely to signal any potential changes during the election campaign.