London (Parliament Politics Magzine) – The Bank of England has maintained interest rates intact at 5% as it put its steps to ease the strain on household budgets on hold.
The Bank’s monetary policy committee (MPC) voted by a bulk of eight to one against establishing a back-to-back reduction in borrowing expenses amid concerns over lingering inflationary pressures. The Bank last month slashed interest rates for the first time since the Covid pandemic was announced four years ago, after a shortfall in inflation from a peak of more than 11% in late 2022 – the most elevated level since the early 1980s.
What are the reasons behind holding rates steady?
Andrew Bailey, the Bank’s governor, expressed inflationary pressures had persisted to ease but cautioned against expectations for immediate interest rate cuts. The annual rate of inflation remained intact at 2.2% in August, marginally beyond the Bank’s 2% inflation target.
How does the BoE’s decision affect the pound’s value?
The decision to maintain rates on hold had been widely anticipated in the City. The pound jumped to its most elevated level against the dollar since March 2022 after the Bank’s decision, hitting $1.33. “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 stated.
How is the BoE addressing persistent inflationary pressures?
Inflation in the UK has dropped back from a peak of more than 11% in the second half of 2022 after Russia’s invasion of Ukraine started a surge in energy prices, falling back earlier this year to more effortless levels close to the Bank’s 2% target. Since slashing interest rates last month the MPC stated inflationary pressures had continued to ease as anticipated.
The Bank cautioned headline inflation was on track to grow to about 2.5% before the end of this year – a marginally lower level than it expected in August – amid resilient price increases in the UK service sector and a tight jobs market. In the minutes of its conference, the MPC stated: “Monetary policy would need to continue to remain restrictive for sufficiently long enough until the risks to inflation returning sustainably to the 2% target in the medium term had dissipated further.”
Underscoring concerns over inflation above the 2% target, the central bank stated it would maintain a process of marketing government bonds amassed on its balance sheet under its crisis-era quantitative easing programme.
Threadneedle Street stated it would lower the stock of UK government bonds by £100bn over the next year, aiming to decrease the total amount to £558bn. At its peak, the Bank held up to £895bn of bonds, in a policy developed to lower borrowing costs and keep markets working efficiently during the 2008 financial crisis and peak of the Covid pandemic.