The Bank of England on Thursday kept its main interest rate at a 16-year high of 5.25 per cent even though inflation has fallen to its target of 2.0 per cent, with several policymakers warning that a premature cut could stoke another bout of price rises.
Seven of the nine members of the bank’s policymaking Monetary Policy Committee, MPC, voted for no change while two backed a rate cut. The vote was consistent with that seen at the bank’s meeting last month. Interest rates have been unchanged since August after a series of hikes.
It was clear in the statement accompanying the decision that there was a divergence of opinion over the outlook for inflation, with some clearly concerned over still-high price rises in the services sector, the primary motor of the British economy.
“It’s good news that inflation has returned to our 2 per cent target,” said Bank of England Governor Andrew Bailey. “We need to be sure that inflation will stay low and that’s why we’ve decided to hold rates at 5.25 per cent for now.”
The decision is likely to disappoint the governing Conservative Party ahead of the United Kingdom’s general election in two weeks time. A cut would have been seized upon by Prime Minister Rishi Sunak as positive economic news, especially as it would have been accompanied by a fall in mortgage rates.
The panel insisted that the imminent election, which the main opposition Labour Party led by Keir Starmer is widely expected to win, had no bearing on its decision. It said the decision was, as always, based on achieving the 2.0 per cent inflation target “sustainably in the medium term”.
Economists believe that a cut is imminent, either at the bank’s next policymaking meeting in August or the following one in September. They expect there will be clear evidence by then that inflation is set to remain around the target over the coming year or two.
“We continue to think that the MPC will start dialling down restrictive policy from summer and deliver two rate cuts this year,” said Sanjay Raja, chief UK economist at Deutsche Bank.
The decline in the main inflation measure to 2.0 per cent in the year to May does not mean that prices are falling – they are just rising at a slower rate than they have for the past few years during a cost of living crisis that has seen living standards drop for millions across Britain.
The fall in inflation follows nearly three years of above-target inflation, which prompted central banks around the world to dramatically increase borrowing costs from the lows seen during the coronavirus pandemic.
The last time inflation in the UK was at 2 per cent was in July 2021 before prices started to shoot up, first as a result of supply chain issues during the pandemic and then because of Russia’s invasion of Ukraine, which pushed up energy costs.
Higher interest rates — which cool the economy by making it more expensive to borrow — have helped ease inflation, but they’ve also weighed on the British economy, which has barely grown since the pandemic rebound.
Critics of the Bank of England say it is being overly cautious about inflation and that keeping interest rates too high for too long will unnecessarily weigh on the economy.
Some central banks, including the European Central Bank, have started to cut rates as inflationary pressures have eased. The Swiss National Bank on Thursday also reduced its main rates by a quarter of a percentage point to 1.25 per cent.
AP
