LONDON — On Thursday, the Bank of England issued a warning regarding increased uncertainty in the economy while deciding to maintain interest rates at 4.75%. This decision comes as inflation in the U.K. has risen to 2.6%, continuing to exceed the bank’s target of 2%, despite the economy showing little signs of growth.
The nine-member Monetary Policy Committee concluded that keeping the interest rate steady was prudent, following its last reduction in November. A lower borrowing cost could lead to an escalation in inflation, which they wish to avoid.
While the decision to hold rates was expected by market analysts, it was noted that three committee members voted in favor of a quarter-point reduction. This could suggest a possible interest rate cut in the upcoming February meeting, depending on how inflation trends.
Bank Governor Andrew Bailey emphasized the necessity of maintaining the 2% inflation target consistently. He stated that although a gradual approach to cutting rates seems appropriate, the volatility in the economic landscape makes it challenging to decide when or by how much to reduce rates in the future.
Homeowners and some struggling sectors in the economy look forward to potential rate cuts next year to alleviate financial pressures. The British economy has recorded two consecutive months of contraction.
Suren Thiru, the economics director at the Institute of Chartered Accountants in England and Wales, remarked that the decision to keep interest rates unchanged, while predictable, would still be disappointing for households dealing with high mortgage payments, as well as businesses facing increased costs from the autumn budget.
The Bank of England’s decision follows the U.S. Federal Reserve’s recent interest rate reduction. However, Fed Chair Jerome Powell has indicated that future rate cuts may be deployed at a slower pace given the upward revision in inflation forecasts.
Minutes from the policy meeting indicate that the committee expressed caution regarding the economic outlook, particularly in light of the recent Labour government’s budget and the potential impact of the upcoming U.S. presidential election.
Critics have noted that the budget delivered in October has both exacerbated inflation and stifled growth. The substantial increase in business taxes might lead companies to either raise prices or reduce hiring to offset their costs. The government defends the tax hike as a necessary measure to stabilize public finances and support underfunded public services.
Additionally, the prospect of Donald Trump assuming the presidency again raises concerns about the likelihood of import tariffs, which could initiate a cycle of retaliatory pricing that fuels inflation and hampers economic growth.
Despite these challenges, inflation in the U.K. and globally remains significantly lower than in previous years. This reduction is largely due to central banks drastically raising borrowing costs from near zero during the COVID-19 pandemic, a response to initial surges in prices triggered by supply chain disruptions and later, the economic fallout from Russia’s invasion of Ukraine.
As inflation rates decline from their peak levels, central banks have begun to lower interest rates. Nevertheless, most economists are cautious, predicting that rates are unlikely to return to the ultra-low levels seen following the 2008-2009 global financial crisis.