The Bank of England (BoE) has left UK interest rates on hold at their current 16-year high of 5.25% for a fourth consecutive time.
In its first meeting of the year, members of the monetary policy committee (MPC) voted in a three-way split to leave the key lending rate unchanged.
A total of six members (Andrew Bailey, Sarah Breeden, Ben Broadbent, Megan Greene, Huw Pill and Dave Ramsden) voted in favour of the proposition while three voted against it.
Jonathan Haskel and Catherine L Mann preferred to increase the bank rate by 0.25 percentage points, to 5.5% and Swati Dhingra voted for a 0.25 percentage point reduction, to 5%.
The overall move was widely expected by economists, and means that rates have now been held at this level since last August.
It also continues to take some of the pressure off borrowers who have seen costs go up steadily from lows of 0.1% at the end of 2021, to the highest rate since early 2008.
Officials at Threadneedle Street had already cautioned that it was “too early” to talk about cutting interest rates, despite a small uptick in inflation in December.
According to the Office for National Statistics (ONS), the cost of living turned out to be stickier than expected, coming in at 4%, up from 3.9% in November, and twice the BoE’s 2% target.
On Thursday, Threadneedle Street said it would keep interest rates “under review”, adding that
inflation will hit its target of 2% in the second quarter of this year but then increase again in the second half of this year.
It blamed “the persistence of domestic inflationary pressures”, adding: “CPI inflation is projected to be 2.3% in two years’ time and 1.9% in three years.”
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Global events will have factored into the BoE’s deliberations too. For example, the recent attacks in the Red Sea are resulting in higher shipping costs, which could pass through to the price of goods,” said Victor Trokoudes, founder and CEO at smart money app Plum.
“Another concern will be the new Brexit border rules which started coming into effect from yesterday. Both EU and UK industry bodies have suggested the additional paperwork to certify all EU products of plant and animal origin at the border will increase costs for consumers.
“Alongside this, issues with the quality of employment data that the BoE uses is a further source of uncertainty and another reason for the BoE to exercise caution. All this means expectations for cuts have come down, with the markets pricing in a reduction of around 1% by the end of the year.”
Money markets believe the first rate cut will be in May, and have priced in four rate cuts this year meaning that by the end of 2024, the interest rate would stand at 4%.
Policymakers also increased their forecast for growth in the UK economy in the coming years.
Gross domestic product (GDP) is expected to grow by 0.25% this year, followed by 0.75% growth in 2025 and then 1% in 2026.
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It comes as the US Federal Reserve left interest rates on hold last night, while chair Jerome Powell looked to cool expectations that it would begin cutting rates as soon as March.
He insisted a March cut was not the Fed’s “base case”, seen as an indication that the central bank could delay easing monetary policy until May.
Lindsay James, investment strategist at Quilter Investors, said: “It is likely though that rate cuts will need to be brought in sooner rather than later. The UK economy is in somewhat of a malaise, and rates at this level for too long may end up being overly constrictive.
“It remains to be seen if a recession can be dodged, and even despite the improving backdrop, failure for economic growth to materialise may just spark the BoE into action.”
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