In a surprising move, the Bank of England has decided to hold interest rates at 5.25%, marking an end to a streak of 14 consecutive rate hikes.[0] This decision comes as a relief to many households and businesses that have been struggling under the weight of rising borrowing costs. The Monetary Policy Committee (MPC) voted 5-4 in favor of keeping rates unchanged, with four members advocating for a 0.25 percentage point increase.
The decision to hold rates reflects the Bank's belief that inflationary pressures are starting to ease. Bank of England Governor Andrew Bailey stated that inflation has fallen significantly in recent months and is expected to continue to do so.[1] However, he cautioned against complacency and emphasized the need for inflation to return to normal levels. Inflation fell to 6.7% in August, down from 6.8% in July, but it remains well above the Bank's target of 2%.[2]
Chancellor Jeremy Hunt expressed his support for the decision, acknowledging the positive signs of inflation starting to subside. He also emphasized the government's commitment to assisting households struggling with mortgage payments.[3] The decision to hold rates is expected to provide some relief to these households, as it means that borrowing costs will not increase further.
The Bank's decision to pause its rate-hiking cycle comes after a period of consistent increases since December 2021. These hikes were aimed at curbing inflation, which has been higher than usual and putting financial pressure on households. However, the Bank now believes that the recent decline in inflation, coupled with other economic indicators, warrants a pause in rate hikes.
The Bank's decision aligns with the US Federal Reserve's announcement to hold interest rates steady. The Federal Reserve also indicated that it expects one more rate hike before the end of the year but fewer cuts in 2024 than previously anticipated.[4] This global trend of central banks pausing rate hikes reflects a cautious approach to balancing economic growth and inflation.
The unexpected decline in inflation has caught many economists off guard, leading investment bank Goldman Sachs to revise its prediction of a rate increase. The bank now expects the Bank of England to leave rates unchanged, citing the surprise inflation reading as a factor in its forecast.
While the decision to hold rates provides some short-term relief, the Bank of England emphasized that rates will need to remain “sufficiently restrictive for sufficiently long” to bring inflation back to its target of 2%.[5] The Bank's goal is to ensure that inflation returns to normal and remains under control in the medium term.
Overall, the Bank of England's decision to hold interest rates reflects a cautious approach to managing inflation and supporting households. While inflation has shown signs of easing, the Bank remains vigilant and committed to taking necessary measures to bring inflation back to its target. The decision also aligns with global trends of central banks pausing rate hikes, indicating a cautious approach to economic growth and inflation management.
0. “At a peak? Bank of England makes 5-to-4 vote to pause interest rates” MarketWatch, 21 Sep. 2023, https://www.marketwatch.com/story/bank-of-england-makes-5-to-4-vote-to-pause-interest-rates-3c67092f
1. “‘We are finally starting to win this battle': Chancellor says the ‘plan is working' as interest rate stays at 5.25%” LBC, 21 Sep. 2023, https://www.lbc.co.uk/news/chancellor-says-plan-is-working-interest-rates-andrew-marr/
2. “Will shock inflation news be enough to stop another rate rise?” Landlord Today, 20 Sep. 2023, https://www.landlordtoday.co.uk/breaking-news/2023/9/will-shock-inflation-news-be-enough-to-stop-another-rate-rise
3. “Hunt: Inflation plan working but households still feeling cost-of-living pain” The Independent, 20 Sep. 2023, https://www.independent.co.uk/business/hunt-inflation-plan-working-but-households-still-feeling-costofliving-pain-b2414875.html
4. “Bank of England ends run of 14 straight interest rate hikes after cooler-than-expected inflation” CNBC, 21 Sep. 2023, https://www.cnbc.com/2023/09/21/bank-of-england-ends-run-of-14-straight-interest-rate-hikes.html
5. “NatWest, HSBC, Lloyds share prices pop after the BoE decision” InvestorsObserver, 21 Sep. 2023, https://www.investorsobserver.com/news/qm-news/5778834386655421
