The Bank of England policymakers have noted that weaker demand for oil is leading to falling prices and warrants a cautious approach to rate cuts.
The Bank of England (BoE) has left UK interest rates unchanged at 5 percent, maintaining its restrictive monetary policy position.
The BoE is cautious about slashing the interest rates “too fast or by too much.” The bank has long stressed that it will keep the monetary policy restrictive for as long as it takes for the inflation to “sustainably” remain at the 2 percent target.
The Monetary Policy Committee (MPC)
voted 8–1 on Sept. 19 to maintain interest rates at 5 percent, unchanged from August. Since the rate was slashed from 5.25 to 5 percent last month, inflationary pressures have continued to ease and the economy “has been evolving broadly as ... expected,” BoE Governor Andrew Bailey said.
“If that continues, we should be able to reduce rates gradually over time,“ he added. ”But it’s vital that inflation stays low, so we need to be careful not to cut too fast or by too much.”
The latest consumer prices index (CPI) inflation data recorded a rise of
2.2 percent last month, unchanged from July. This is slightly higher than the BoE’s target of 2 percent, which was recorded in May and June.
Inflation is
expected to increase to about 2.75 percent over the second half of the year, owing to a smaller expected drag from domestic energy bills. Further down the line, inflation is expected fall back to 1.7 percent in two years’ time and to 1.5 percent in three years.
Eight MPC members, who preferred to hold interest rates, have indicated that they think a gradual approach to easing rates is necessary.
The committee had a range of views on whether expectations of stabilising inflation, coupled with BoE’s restrictive stance, would lead to further easing in underlying domestic inflationary pressures. The majority of MPC members noted that weaker demand for oil is leading to fall in prices and warrants their need for caution.
Only one member, Swati Dhingra, voted to reduce rates to 4.75 percent because she thought that the firm downward trajectory of inflation warranted a less restrictive approach.
The BoE’s restrictive monetary policy stands in contrast to the
latest decision by the Federal Reserve to cut interest rate by an unusually large half-point. In a statement, released on Wednesday, the Federal Reserve lowered its key rate to roughly 4.8 percent.
The Fed said it had “gained greater confidence that inflation is moving sustainably toward 2 percent” and noted that while the unemployment rate has moved up, it remains low.
This is the Fed’s first cut in more than four years and comes weeks before the presidential election on Nov. 5. The bank’s policymakers said they will continue monitoring the economic outlook and are prepared to “adjust the stance of monetary policy as appropriate if risks emerge.”
Stagnation and Mortgages
The BoE’s current expectations of GDP growth in the third quarter of the year are weaker than in their August report. The bank staff now estimate a growth of 0.3 percent, compared to the expected increase of 0.4 percent.This comes after official figures have
recorded no GDP growth in both July and June. The news of economic stagnation comes ahead of what is expected to be a difficult Autumn Budget statement in October, set to include a number of public spending cuts.
The cost of borrowing remaining unchanged will affect many homeowners and first-time buyers. A
report by the Building Societies Association (BSA) has found that mortgage affordability remains the biggest barrier to buying a home.
Commenting on the MPC’s decision, the head of mortgage and housing policy at BSA, Paul Broadhead,
said that almost
half of UK adults expected to see a reduction in interest rate this month.
“We still expect the bank rate will reduce this year; however this is happening much later and slower than we had anticipated earlier in the year,” he said.
