The Bank of England’s rate-setting body was split three ways in its decision to hold interest rates at 5.25%, marking the first time since the 2008 financial crisis that there has been a three-way split on whether rates should rise or fall. This decision came despite discussions to cut borrowing costs as inflation fell quickly this year. Although one Bank policymaker voted for an immediate cut, two members of the monetary policy committee backed an increase to 5.5%. The remaining six members voted to keep rates unchanged.
The Bank of England has been raising rates over the past few years to lower inflation, with the last rate rise being in August last year. By making borrowing more expensive, interest rates can cool inflation and discourage people and businesses from taking on debt to fund spending. Inflation has fallen sharply from a 40-year peak in October 2022, currently standing at 4%. The Bank aims to keep price growth at, or close to, a target of 2%. The bank is charged with keeping price growth at or close to this figure.
Governor Andrew Bailey said that although the bank is suggesting that rates have peaked, any cuts in interest rates may be some months away. He also said that there needs to be more evidence that inflation is set to fall all the way to the 2% target, and stay there, before they could lower interest rates. Some economists have expressed concern about the fall in inflation, stating that it is “artificial” due to the cut in the energy price cap and that inflation will rebound somewhat over the summer as global energy prices have picked up.
The Bank’s new forecasts indicate that keeping rates at their current level could push a barely growing economy into an outright recession. Paul Dales, chief UK economist at Capital Economics, said that the Bank “sent some soft signals that the next [interest rate] move will be a cut, but it pushed back more strongly against the idea that rates will be cut soon or far”. However, he expected a faster fall in inflation and predicted that the Bank would “change its tune in the coming months.
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