Bank of England kept interest rates at 5.25%

Updated on October 17, 2023

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The Bank of England has kept interest rates intact at 5.25 percent after a knife-edge vote that could signal a peak in borrowing costs after almost two years of rate rises.

Thursday’s decision sent the pound to its lowest level against the dollar in six months as investors played down expectations of further rate rises. Mortgage rates are expected to fall further following the decision, following cuts by several lenders this week.

Following better-than-expected inflation data a day earlier, the bank’s monetary policy committee split five to four in favor of leaving rates unchanged, with BoE governor Andrew Bailey casting the final and deciding vote.

This was the first pause after 14 consecutive rate hikes since the start of the tightening cycle in December 2021.

On Wednesday, the US Federal Reserve also voted to keep its benchmark rate steady as borrowing costs rose to their highest level since the financial crisis.

As prices rise slowly after the worst inflation shock in 40 years, the world’s major central banks have refrained from declaring victory over inflation, but all signs are that rates are at or near their peak. Are.

Although the MPC offered little comment about its future actions, the majority supporting the decision indicated that further rate increases were unlikely to be needed in the coming months.

Five MPC members wrote about the importance that the current level of rates be “maintained” rather than “raised” – until progress is made in bringing inflation down to the BoE’s 2 percent target.

Yelselfin, chief economist at KPMG UK, said interest rates “have likely reached their peak this cycle”, while BOE officials would monitor the data to assure that policy was restrictive enough to bring down inflation.

Mortgage prices have already been falling since mid-summer and lenders including NatWest, TSB and Nationwide have announced cuts this week, while many providers have offered new five-year fixed rates of less than 5 per cent.

But swap markets still give about a 70 percent chance of the BOE raising its benchmark rate to 5.5 percent in the final quarter before March next year.

Sterling, which had already weakened after Wednesday’s inflation data, pared its losses to 0.4 percent after hitting a six-month low of $1.2239 against the dollar.

Real estate stocks rose slightly after the MPC vote, with Barrett Developments and Berkley Group rising about 2 per cent each before giving up most of their gains.

The MPC’s decision was a piece of good economic news for Prime Minister Rishi Sunak as he tried to take charge of the political agenda by delaying key net zero targets.

This followed on Wednesday an unexpected drop in inflation to 6.7 per cent for August, which set Sunak on course to achieve his target of “halving inflation” this year.

Bailey said inflation would continue to decline, but cautioned that there is “no room for complacency” and BOE officials did not completely rule out another rate hike in the coming months. “If there is evidence of persistent inflationary pressures, further tightening of monetary policy will be required,” the MPC said.

Of the members who supported rising rates, a minority contested that there was evidence of such pressures, saying that higher borrowing costs would “more deeply address the risks of underlying inflation persistence”. .

The Committee also unanimously agreed to increase the pace of its quantitative tightening process for the coming year from £80bn in 2022-23 to £100bn in 2023-24.

The MPC said it considered interest rates an active tool of monetary policy, and said the impact of its asset sales on borrowing costs was “marginal”.

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