Interest rates in the UK are to remain unchanged at 5.25%, according to the Bank of England, in what was widely-expected news. This is the fifth time in a row rates will remain the same, leaving the cost of borrowing at its highest level in 16 years. Eight of the nine setters voted to hold rates, with only one voting to introduce a cut. The Bank has sustained high interest rates in an effort to slow consumer price rises, however, last month saw inflation rates fall to the lowest since 2018.
Governor, Andrew Bailey, said that although he had seen “encouraging signs” that inflation was falling, policymakers had to be sure it would reach its target at 2% and remain there. Bailey said “we’re not yet… at the point where we can cut off interest rates, but things are moving in the right direction;” leading economists to speculate that rates will begin to fall as early as June. Members of the Monetary Policy Committee (MPC) said that after the vote, any possibility that they were to be hiked in the future is unlikely.
The Bank suggested that inflation will fall just below 2% by the summer but warned that unrest in the Middle East and disruption to the Red Sea route posed “material risks” of a price surge occurring again. It was mentioned that the Red Sea conflict has caused a delay to shipments of up to three weeks, and as a result, container charges have increased. Consignment that are typically bulky items like clothing, electrical and DIY have been affected the most.
While the Bank of England is independent of the government, it tries to maintain price growth around 2%. It raises, holds, or lowers rates to try to achieve this, and has held rates steady since a run of 14 consecutive increases. The banking theory behind raising rates to fight inflation is to make borrowing more expensive, leading more people to cut back on spending. The resulting fall in demand helps with easing price rises. However, constantly high interest rates can harm the economy as businesses are less likely to invest in jobs and production
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