Following yesterday’s news that inflation had dropped again, to 6.7%, the Bank of England (BoE) finally bucked the trend of increasing interest rates that began in late 2021, by voting to hold the interest rate at its current level of 5.25%.
It was a narrow win for the more dovish members of the Monetary Policy Committee (MPC), with the freeze on interest rates voted by a slim majority of 5-4. The four MPC members who voted against freezing interest rates all voted for increase the Bank Rate by 0.25 percentage points to 5.5%.
In their announcement, the Monetary Policy Committee (MPC) argued that its vote came down to the fact that “twelve-month CPI inflation fell from 7.9% in June to 6.7% in August, 0.4 percentage points below expectations at the time of the Committee’s previous meeting,” and has projected that CPI inflation will continue to fall in the short term.
In a continuing bid to reach its 2% inflation target, the Monetary Policy Committee (MPC) reiterated its promise to “monitor closely indications of persistent inflationary pressures and resilience in the economy as a whole”.
Commenting on the news, the Chancellor, Jeremy Hunt, remains positive that the government and Bank of England’s plans on tackling inflation were working, saying “we are starting to see the tide turn against high inflation, but we will continue to do what we can to help households struggling with mortgage payments.
“Now is the time to see the job through. We are on track to halve inflation this year and sticking to our plan is the only way to bring interest and mortgage rates down,” Hunt continued.
Today’s decision also differs from both the Eurozone and US federal reserve, who committed to rises of 4% and 5.25% respectively.
The announcement marks a step change from the previous 14 announcements, where the Bank of England (BoE) had incrementally increased the base rate each time. While the BoE has held off from pushing on the interest rate lever again, at 5.25% the base rate remains at its highest level since 2008.
A knife’s edge
In the run-up to the announcement, nerves were shredded across the UK economy, as investors slashed bets on a rise the day before due to a lower-than-expected increase to inflation during August and Bank of England (BoE) Governor Andrew Bailey having cast doubts on the prospect of further increases.
While the Bank of England (BoE) made clear it would continue to raise interest rates in the face of persisting inflation, it would seem that the recent news of a lower-than-expected rise in August was sufficient to put a stop to yet another base rate increase.
Today’s announcement has confirmed rumours that the Bank of England (BoE) is finally at the end of its current tightening cycle. Giving evidence to MPs earlier this month, Governor Andrew Bailey said that the UK is “much nearer the top of the cycle”, while Monetary Policy Committee (MPC) member Swati Dhingra argued that rates had already gone too far.
Making a dent
With inflation down from its peak of 11.1% in October of last year, at 6.7%, the Bank of England (BoE) is likely feeling that its recent aggressive approach to its interest rate increases has been justified. However, its target of 2% inflation is still some way off.
In an interview by Sky News before the announcement, Chancellor of the Exchequer Jeremy Hunt struck a positive tone, noting that “If you look at the overall picture since inflation peaked it is now down 40% – and that says the plan is working.
“But even at 6.7% that is a lot for ordinary families… which is why it is essential to stick to that plan,” Hunt continued.