Bank of England Holds Interest Rate at 5.25 Percent After Two Years of Hikes

A view of the Bank of England in London, on Feb. 2, 2023. Yui Mok/PA Media

The Bank of England (BoE) has kept interest rates on hold for the first time in almost two years, after a close vote decision against raising the current rate of 5.25 percent.

The streak of bad luck for borrowers in the UK has been paused on Thursday, when the BoE’s Monetary Policy Committee (MPC) voted by a slim majority of five–four to keep the interest rate unchanged.

This comes despite the markets’ prediction of a hike up to 5.5 percent. The latest inflation figures, which came a day before the vote, appear to have had an impact on the Bank.

On Wednesday, the CPI inflation was reported to slow down from 6.8 percent in July to 6.7 percent in August.

This may have swayed the decision by the MPC members, in contrast to the previous 14 times they opted for an interest rate increase.

Speaking after the BoE’s announcement, the bank’s governor Andrew Bailey, who voted for a hold, said: “Inflation has fallen a lot in recent months, and we think it will continue to do so. That’s welcome news. But there is no room for complacency.

“We need to be sure inflation returns to normal and we will continue to take the decisions necessary to do just that.”

Never-Ending Cycle

The seemingly never-ending cycle of interest rate increases started in December 2021, when the bank rate moved from 0.1 percent to 0.25 percent, followed by almost two years of hikes. That cycle has now been put on pause, but only after it had severely affected households and businesses across the country.

The government has been trying to fight high inflationary pressures on Britons, vowing to halve the inflation by the end of the year. This will only bring the inflation rate to 5 percent, which is high by historical standards and significantly higher than the government’s target of two percent.

With inflation easing slightly in August, the government took the win but admitted there was still “immense pressure on family budgets.”

Reacting to BoE’s decision, the Federation of Small Businesses (FSB) said that the interest rate plateau must be permanent. Many small firms have suffered financially as the Bank tried to “cure” financial pressures in the form of 14 consecutive rises, said FSB National Chair Martin McTague.

The Institute of Directors (IoD), which represents business leaders, has previously warned against high interest rates that worsen the outlook for the economy.

“The Bank of England should now give its medicine time to work. The holy grail of a soft landing where we bring inflation down without causing a recession is still possible,” chief economist at the IoD, Kitty Ussher, said.

Bigger Picture

The BoE has indicated that the interest rate will stay as it is for quite some time. However, it doesn’t mean that it has reached its peak.

Shadow chancellor Rachel Reeves proposed to look at the bigger picture of what the BoE decision means for mortgage payers in the UK.

“Somebody who are coming up to remortgage their house today is looking at paying £220 pounds more a month than a year ago. So this is still a very challenging time for families and businesses with the cost of living crisis continues to bite,” Ms. Reeves said.

Homeowners on standard variable mortgage, will be more impacted by the BoE decision, but the reality for most is that their next mortgage deal will be more expensive.

Fewer people are looking to buy property, and more turn to renting, which in turn leads to higher demand and a spike in prices.

The latest ONS report on rentals showed that prices rose by 5.5 percent in the year to August.

UK GDP has dropped in July by 0.5 percent in services, production, and construction. The BoE said it expected the GDP to rise only slightly in the third quarter.

Underlying growth in the second half of 2023 is also likely to be weaker than expected, the Bank said.