Bank of England Maintains 5.25% Interest Rates Despite Inflation Improvements. The news has sparked hopes for relief for mortgage-payers in the coming months. This decision, which was widely expected by markets, was taken by the Monetary Policy Committee (MPC) with an 8-1 majority to pause rates, with one member preferring a 0.25 point cut. Notably, there was no support for further increases, contrasting with two economists who had supported additional hikes in the previous month.
Chancellor Jeremy Hunt highlighted the sharp drop in the headline Consumer Price Index (CPI), stating it ‘opened the door’ for the Bank of England to act soon. The Pound slightly dipped on the announcement, as traders anticipated a decrease in interest rates in the near future.
The MPC’s minutes from the meeting indicated that inflation had been weaker than expected and is likely to fall below the 2% target in the second quarter of the year. However, they cautioned that there were still signs of ‘persistence’ in price rises, attributing the sharp fall in headline CPI inflation to base effects and external effects from energy and goods prices.
Despite the cautious stance on potential rate cuts, given the rate of inflation slowdown and an economy in recession, there are concerns that the Bank of England might prolong economic struggles by keeping policy too tight for too long. The Prime Minister’s official spokesman expressed full confidence in the Bank of England’s Governor Andrew Bailey, noting the clear signs that the economy has turned a corner after the shocks of the last few years, with inflation dropping to 3.4%, real wages rising, and mortgage rates starting to fall.
The restrictive stance of monetary policy is weighing on activity in the real economy, leading to a looser labor market and bearing down on inflationary pressures. However, key indicators of inflation persistence remain elevated. The MPC has judged since last autumn that monetary policy needs to be restrictive for an extended period until the risk of inflation becoming embedded above the 2% target dissipates.
The Bank of England’s decision to hold rates steady, with a dovish signal on potential cuts, reflects the central bank’s balancing act between steering inflation sustainably back to 2% and avoiding pushing the economy into a prolonged downturn. The U.K. economy slid into a technical recession in the final quarter of 2023 and has endured two years of stagnation, making the central bank’s actions critical.
Economists believe it could be August before the Bank acts to bring borrowing costs down, indicating a gradual shift towards more dovish monetary policy. The decision to hold rates at 5.25% for a fifth consecutive time, while acknowledging the prospects for a cut are now “moving in the right direction,” suggests a cautious approach to managing inflation and supporting the economy.
The Bank of England’s decision to hold interest rates at 5.25% is a complex one, reflecting the need to balance the fight against inflation with the desire to support economic recovery. The decision to hold rates steady, with a hint of potential cuts in the future, suggests a cautious approach to managing inflation and supporting the economy, while also indicating a gradual shift towards more dovish monetary policy.
What factors influenced the MPC’s decision to hold interest rates at 5.25% despite good news on inflation?
The Monetary Policy Committee (MPC) of the Bank of England’s decision to hold interest rates at 5.25% despite good news on inflation was influenced by several key factors:
- Inflation Projections and Risks: The MPC judged that the risks around the modal inflation projection were skewed to the upside over the first half of the forecast period, stemming from geopolitical factors. However, risks from domestic price and wage pressures were now more evenly balanced. This meant there was no difference between the MPC’s modal and mean projections at the two and three-year horizons.
- Need for Restrictive Monetary Policy: The MPC concluded that monetary policy would need to remain restrictive for sufficiently long to return inflation to the 2% target sustainably in the medium term, in line with the MPC’s remit. This decision was based on the assessment that monetary policy needed to be restrictive for an extended period until the risk of inflation becoming embedded above the 2% target dissipated.
- Economic Activity and Labour Market: The restrictive stance of monetary policy was weighing on activity in the real economy and leading to a looser labour market. Despite the fall in headline CPI inflation, key indicators of inflation persistence remained elevated. The Committee noted that the labour market was still relatively tight, consistent with a rise in the medium-term equilibrium rate of unemployment, and a range of indicators suggested that the pace of loosening had been slow.
- Economic Data and Market Expectations: The MPC’s decision was also influenced by the latest economic data and market expectations. The Committee noted that all respondents to the Bank’s latest Market Participants Survey (MaPS) expected Bank Rate to be left unchanged at this MPC meeting and expected the next move in the Bank Rate to be downward. This reflected the significant tightening of monetary policy implemented since the end of 2021 to contain the persistence of second-round effects on inflation as well as continued weakness in potential supply growth.
- Supply and Demand Conditions: The MPC completed its annual supply stocktake and judged that potential supply growth remained weak by historical standards. The degree of excess demand had been a little higher over the recent past than had been assumed in the November Report, implying weaker supply growth in the past. At the same time, it had revised up slightly its view of potential supply growth in the future, although this was still expected to be weaker than the rates seen pre-Covid.
- Global Economic Conditions: Since the MPC’s previous meeting, global GDP growth has remained subdued, although activity continues to be stronger in the United States. Inflationary pressures are abating across the euro area and United States. Wholesale energy prices have fallen significantly. Material risks remain from developments in the Middle East and from disruption to shipping through the Red Sea.
Bank of England Maintains 5.25% Interest Rates Despite Inflation Improvements – Here’s how this decision affects the UK economy and the mortgage market
The Bank of England’s decision to hold interest rates at 5.25% despite good news on inflation has several implications for the UK economy and the mortgage market:
- Impact on Mortgage Borrowers: The decision to maintain the interest rate at 5.25% means that mortgage borrowers, particularly those on variable rate and tracker deals, will continue to face higher repayments. This is because lenders pass on the revised cost of borrowing to their customers. Additionally, over 500,000 mortgage holders are expected to reach the end of their fixed-rate deals during the remainder of 2023, potentially leading to increased payments when they negotiate a new home loan.
- Economic Stability and Inflation Control: The Bank of England’s decision reflects its ongoing efforts to control inflation, which has been a significant concern for the UK economy. By keeping rates high, the Bank aims to curb inflationary pressures and maintain economic stability. This approach, however, can lead to higher borrowing costs for consumers, including those with mortgages.
- Potential for Future Rate Cuts: Despite the current decision to hold rates steady, the Bank of England has indicated that the prospects for a cut are now “moving in the right direction.” This suggests that the central bank may be preparing to lower interest rates in the future, which could provide relief for mortgage-payers. Economists believe it could be August before the Bank acts to bring borrowing costs down.
- Influence on the UK Economy: The decision to maintain high interest rates is part of the Bank’s broader strategy to combat inflation and support economic recovery. By keeping rates high, the Bank aims to encourage savings and discourage borrowing, which can help to stabilize the economy. However, this approach can also have negative effects on consumers, particularly those with mortgages, who may face higher repayments.
- Impact on Savers and Investors: While the decision to hold rates at 5.25% primarily affects borrowers, savers and investors may also be impacted. The Bank of England’s decision to maintain high interest rates could lead to lower returns on savings and investments, as the cost of borrowing remains high. However, the Bank’s actions are aimed at controlling inflation and stabilizing the economy, which are critical for the long-term health of the UK economy.
In summary, the Bank of England’s decision to hold interest rates at 5.25% has implications for both the UK economy and the mortgage market. While this decision is aimed at controlling inflation and supporting economic stability, it also means higher borrowing costs for mortgage borrowers. The Bank’s indication of potential future rate cuts suggests that relief for mortgage-payers may be on the horizon.
