Bank of England holds key rate as it warns of ‘heightened uncertainty’
In response the rate-setting panel, which last cut its key rate in November, is taking a cautious stance because lower borrowing costs could potentially stoke inflation even further.
The U.K.'s central bank issued a warning on Thursday about "heightened uncertainty" as it opted to keep interest rates steady, despite inflation continuing to rise above its target, at a time when the British economy is stagnating.
The Bank of England’s nine-member Monetary Policy Committee decided to maintain its main interest rate at 4.75%, following new data showing inflation climbing to 2.6%, which is above the bank’s target of 2%.
In response, the committee, which last reduced the key rate in November, is taking a cautious approach, concerned that lowering borrowing costs could exacerbate inflation.
While this decision was widely expected, it was notable that three of the committee members voted for a quarter-point rate cut, suggesting the possibility of further reductions at the next policy meeting in February, unless inflation takes an unexpected turn.
“We need to make sure we meet the 2% inflation target on a sustained basis,” said Bank of England Governor Andrew Bailey, who voted to keep rates unchanged. “We think a gradual approach to future interest rate cuts remains right, but with the heightened uncertainty in the economy, we can’t commit to when or by how much we will cut rates in the coming year.”
Many sectors struggling in the U.K. economy, as well as homeowners, are hoping for more rate cuts next year to ease the burden. The British economy has now contracted for two consecutive months.
“The bank’s decision to keep interest rates on hold, while expected, will still come as a blow to households facing high mortgage payments and businesses dealing with rising costs after the autumn budget,” said Suren Thiru, economics director at the Institute of Chartered Accountants in England and Wales.
The Bank of England's decision came one day after the U.S. Federal Reserve reduced interest rates. However, Fed Chair Jerome Powell indicated that future rate cuts would be slower after inflation forecasts were revised higher.
The minutes of the Bank of England’s decision showed that rate-setters expressed caution about the economic outlook following the new Labour government’s first budget and the outcome of the U.S. presidential election.
Critics contend that the October budget has heightened inflationary pressures while also slowing growth. A significant increase in business taxes could force companies to raise prices or reduce hiring to cover higher costs. The government, however, argues that the tax hikes were necessary to stabilize public finances and fund public services.
With Donald Trump set to return to the White House in January, there is uncertainty about whether the new U.S. administration will impose tariffs on imports, which could trigger retaliatory measures that would drive inflation and slow growth.
Despite these challenges, inflation in the U.K. and globally is much lower than it was a few years ago. Central banks raised borrowing costs significantly during the coronavirus pandemic when prices surged due to supply chain disruptions and the Russian invasion of Ukraine, which drove up energy prices.
As inflation has dropped from multi-decade highs, central banks have begun cutting rates, though few economists believe rates will return to the ultra-low levels seen after the 2008-2009 financial crisis.
