Closing post
Time to wrap up….
The Bank of England has kept interest rates unchanged at 5% as it put its efforts to ease the pressure on household budgets on hold.
The Bank’s monetary policy committee (MPC) voted by a majority of eight to one against launching a back-to-back reduction in borrowing costs amid concerns over lingering inflationary pressures.
The Bank last month cut interest rates for the first time since the Covid pandemic was declared four years ago, after a sharp fall in inflation from a peak of more than 11% in late 2022 – the highest level since the early 1980s.
Andrew Bailey, the Bank’s governor, said inflationary pressures had continued to ease, but cautioned against expectations for rapid interest rate cuts, saying:
“The economy has been evolving broadly as we expected. If that continues, we should be able to reduce rates gradually over time. But it’s vital that inflation stays low, so we need to be careful not to cut too fast or by too much.”
Bailey later told broadcasters that he was “optimistic” that inflation pressures would ease enough to allow further cuts to interest rates.
He said:
We’re now on a gradual path down. That’s the good news.
I think interest rates are going to come down. I’m optimistic on that front, but we do need to see some more evidence.
And of course, we’ll be looking at this at every meeting.
City economists predicted the Bank would cut interest rates in November, and make perhaps four quarter-point cuts to rates in 2025.
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Updated
By leaving UK interest rates on hold today, the Bank of England has fallen behind several fellow major central banks.
At 5%, UK interest rates are just 25 basis points (a quarter of one percentage point) below their highest level reached in the tightening cycle which ran over the last few years.
In contrast, the US Federal Reserve has just cut its rates by 50 basis points.
The European Central Bank has made two quarter-point cuts this year, meaning its deposit rate is now 50 basis points off its recent peak.
The Swiss National Bank has also made two 25bp cuts in 2024.
Adrien Pichoud, chief economist at Bank Syz, says that difference has strengthened the pound:
Importantly, as the Fed embarks on a policy of monetary easing and the ECB also cuts its key rates, the spread between sterling and other major currencies supports sterling, which reached its highest level in two years against the dollar and the euro after today’s announcement.
The strength of the currency will help to bring down inflation by containing pressure on imported goods and services. Sterling’s strength is also a headwind for exporters, which will ultimately weigh on the outlook for economic growth.
