The Bank of England has decided to hold interest rates at 4%, a move that reflects ongoing concerns regarding inflation within the UK economy. The central bank stresses its long-run intention to control inflation. One of its main missions is to maintain inflation at around its long-term target rate of 2%. The bank’s approach appears cautious, with Governor Andrew Bailey indicating that any future adjustments will require a “gradual and careful” method.
In recent months, the Bank of England has been actively reducing its debt holdings, primarily in government bonds, by approximately £100 billion each year. This step constitutes one piece of a larger plan to restore economic stability while the nation continues to face challenges from inflation. Only two of the bank’s nine rate-setters dissented against lowering interest rates down to 3.75%. Their decision emphasizes the sharp divide in Washington on how best to address the most urgent economic crisis facing the nation.
Our borrowers and savers are looking forward to the announcement. At the moment the average two-year fixed mortgage rate is 4.98% with the average five-year deal just a tad more expensive at 5.02%. All of these figures paint the picture of very high effective cost of borrowing in the context of a long period of very slow economic growth. Food inflation has been rising and the bank has maintained these rates during a period of food inflation that reached 5.1%. That’s equivalent to a typical supermarket shopping trip that cost £100 last year now costing £105.10.
The Bank of England’s focus on stabilising prices is still a bedrock principle of its monetary policy. This responsibility highlights the vital task of controlling for inflation while keeping an eye on the overall economic situation. Rates are going down, Governor Bailey has said again and again on the stump. He underscores the bank’s pledge to continue making its way through assorted economic unknowns with a light touch.
In addition to holding interest rates steady, the bank faces two more significant rate decisions in the upcoming months, scheduled for November and December. This timeline shows that the Bank of England is being extremely cautious in evaluating current economic conditions before making any additional moves.
For one, the market has reacted to today’s ruling, pushing the pound down some against the dollar already. The current economic situation has led a wide array of actors from across the country to speak out against the damaging effects of exorbitant interest rates. This surely underlies recent remarks by Shadow Chancellor Mel Stride on high rate blaming them on what he called “Labour fueled Inflation.” He further noted, “There’s deep nervousness about the drumbeat of bad economic news: inflation doubled, growth flatlining, 150,000 jobs lost since the Budget.”
The recent economic situation has further contributed to an increase in savings rates across the country. So far in 2023-24, 2.6 million more people are saving or investing. And they are doing all of this by introducing Individual Savings Accounts (ISAs). The best average one-year fixed cash ISA rate is now 3.89%, with easy access ISA rates at 2.76%.
The Bank of England’s rate-setting committee has concluded that maintaining a gradual and careful approach to any future rate cuts is appropriate under current circumstances. And Michael Race from Georgetown joined us in lamenting that. He said the committee agreed that a slow and deliberate pace still is warranted. Based on these factors, analysts predict that large rate cuts won’t arrive until February of next year at the earliest.