Bank of England keeps interest rates steady for the first time in almost two years

The Bank of England left interest rates unchanged on Thursday, the first time in nearly two years that it opted not to raise rates during its long-running battle against extremely high inflation.

The decision comes a day after data showed inflation unexpectedly slowed in Britain. Central bank policymakers held interest rates at 5.25 percent, the highest since early 2008, after 14 consecutive rate hikes were halted. But it was a close call; Only five of the Bank’s nine rate-setters voted to keep rates intact.

“Inflation has declined significantly in recent months and we expect this to continue,” central bank Governor Andrew Bailey said in a statement. “But there is no room for complacency.” He was among the narrow majority in favor of keeping rates steady.

According to minutes of this week’s policy meeting, interest rates need to remain “sufficiently restrictive long enough” to get inflation back to the central bank’s 2 percent target. The minutes said officials also left the door open to further rate increases “if there is evidence of persistent inflationary pressures.”

The Bank of England’s pause comes during a long and tumultuous fight against inflation. The central bank began a rate hike cycle in December 2021, raising rates from near zero to a high last seen during the 2008 financial crisis. In that time, inflation has risen faster than economists expected and remains high despite bottoming out. From its peak of nearly 11 percent in October.

Policy makers have come under intense public pressure for not maintaining a firm grip on inflation and for not anticipating the problem in their forecasts. Former US Federal Reserve Chairman Ben Bernanke will lead a review of the bank’s forecasting processes, the central bank said.

This week there were some news in favor of the central bank. Consumer prices rose 6.7 percent in August from a year earlier, slightly lower than the previous month. Economists had expected the rate to rise due to a global rise in energy prices. Instead, slower food price inflation and other factors pulled down the overall rate of inflation.

Even better for the central bank, measures of domestic inflation pressures also slowed. The annual rate of core inflation, which strips out energy and food costs, which are more volatile and influenced by international markets, fell to 6.2 percent in August from 6.9 percent the previous month. And services inflation, which is strongly influenced by companies’ wage costs, slowed more than the central bank had forecast.

As inflation rates are falling around the world and economies are weakening, partly due to aggressive policy tightening by central banks, officials are trying to carefully calibrate the right level of interest rates. Many central banks are focusing their attention on how much to raise interest rates and how long they will need to be kept high.

On Wednesday, the Federal Reserve made no changes to interest rates, but officials suggested they expected another rate hike before the end of 2023. Last week, European Central Bank policymakers said they were likely to raise interest rates, based on their assessments. of the economy, and would keep rates high “for a substantially longer period.”

Before the Bank of England’s decision was announced, according to trading in financial markets, it was almost likely that the central bank would raise or keep rates steady. In the end, it was a split decision among the nine members of the central bank’s rate-setting committee. The five policymakers who voted to keep rates steady, including Mr. Bailey, cited lower-than-expected inflation rates and signs that the labor market is loosening, with unemployment rising in recent months and job vacancies falling. Are.

The other four, including the committee’s newest member Megan Green, voted in favor of extending it The increase in rates by a quarter point, arguing that the economy’s resilience, higher wage growth and other indicators showed there was evidence of more persistent inflation pressures.

One of the challenges the Bank of England faces is the surprising strength of the economy, which has avoided recession as consumers have continued to spend despite rising prices and higher interest rates. Recently, the UK Statistics Office said that the economy has recovered more strongly than initially estimated after the lockdown imposed due to the pandemic.

But as the impact of higher interest rates is being felt across most parts of the economy, the outlook is bleak. The Organization for Economic Co-operation and Development said this week it expects the British economy to grow by 0.3 percent this year, the slowest among developed economies, and by 0.8 percent next year.

So far, the impact of higher interest rates has been felt mostly in the housing sector, where homeowners have faced a jump in their mortgage payments and housing investment has declined.

The Bank of England also announced on Thursday that it would continue to sell its stock of government bonds acquired after the financial crisis. Over the next year, the bank plans to reduce its bond holdings by £100 billion, or about $123 billion, to £658 billion.

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