Bank of England holds Interest at 5.25% again

The Bank of England has held interest rates for the second meeting in a row, but signalled that they will stay high for an “extended period of time”.

Members on the nine-strong monetary policy committee (MPC) today voted 6-3 in favour of leaving the base rate at 5.25 per cent, a move that was widely anticipated.

In a downbeat set of fresh forecasts, the Bank said that inflation would not return to the 2 per cent target until the end of 2025 and that the economy would flat line for most of the next year, meaning Britain would be in a state of “stagflation” heading into the next general election, which must be held by January 2025.

Compared to its last set of projections in August, the Bank thinks the economy will grow 1 per cent slower over the coming years.

The central bank’s rate setters also warned that there are “upside risks to inflation from energy prices” from the conflict in the Middle East. Given the persistence of inflation, interest rates will “need to be restrictive for an extended period of time”, the MPC said in a statement.

Andrew Bailey, the governor of the Bank, that the central bank would be “watching closely to see if further rate increases are needed. It’s much too early to be thinking about rate cuts”.

The MPC has lifted the UK base rate from a record low of 0.1 per cent to a 15-year high of 5.25 per cent between December 2021 and August 2023, the fastest increase since the 1980s. That was intended to bring down inflation, which has dropped from a peak of 11.1 per cent last year to 6.7 per cent. The Bank expects inflation to decline to 4.9 per cent in October.

Higher interest rates whittle down inflation by making it more expensive for households and businesses to borrow, removing demand from an economy. This should, in theory, rein in price growth.

A rapid tightening in financial conditions in the UK has piled misery on to homeowners and strained the housing market, with property prices declining at the fastest pace since 2009. Unemployment has risen quicker than expected to 4.2 per cent and the rate of business failures has also reached levels last seen since just after the financial crisis. Unemployment could top 5 per cent, the Bank forecast today.

Concerns about heaping unnecessary damage on to households and businesses by pushing interest rates too high convinced the MPC to hold for the second successive meeting, the longest pause since it began tightening policy.

The group estimated that around half of the effects of prior rate rises are still to spread through the economy. These will emerge as around 2 million homeowners roll on to new mortgages with more punitive rates by the end of next year.

Financial markets think that the MPC has now adjusted to a policy of leaving the UK base rate at its current level for some time to hold inflation at bay instead of lifting it to a steeper peak only to lower it shortly after. Rate cuts are not expected until late next year.

Other monetary authorities have adopted a similar approach, including the Federal Reserve, the American central bank, and the European Central Bank. United States and eurozone rates were held steady over the past week.

The six members of the MPC that favoured leaving interest rates unchanged at 5.25 per cent included Bailey, Huw Pill, the Bank’s chief economist, and Sarah Breeden, who voted for the first time at a rate setting meeting since replacing Sir Jon Cunliffe on the MPC. Catherine Mann, Jonathan Haskel and Megan Greene voted to increase the base rate by 0.25 percentage points.

Speaking about the announcement, Michael McGowan, Managing Director, Foreign Exchange, Bibby Financial Services, said “After September marked the first pause in a brutally long run of rate rises, it’s come as no surprise that the Bank of England held the interest rate steady again today – especially after this week’s fall in food price inflation. Businesses may dare to hope the summit has been reached and hikes are at an end.

Yet a rate of 5.25 per cent is no walk in the park for businesses – and SMEs, who rely most on external finance, will be feeling the pinch hardest. What’s more, for the 53% of UK SMEs that import and/or export across borders, the rate pause has already sent the pound tumbling against the dollar and the euro, which represents a potential a blow to profitability.

It’s critical then that SMEs –- the backbone of the UK economy – closely monitor their foreign currency needs while fluctuations persist, to mitigate the risks of a weaker pound and current volatility.”