Bank of England Votes to Hold Interest Rate at 5.25 Percent

Many mortgage-holders are yet to experience the impact of the bank’s two-year long cycle of interest rate hikes, paused in September.

Governor of the Bank of England Andrew Bailey addresses the media on the Monetary Policy Report at the Bank of England, in London, on Nov. 3, 2022. Toby Melville/Pool/AFP via Getty Images

The official bank base interest rate in the UK has remained at 5.25 percent, following a vote by the Bank of England (BoE).

The decision by the bank’s Monetary Policy Committee (MPC) was published on Thursday, after a 6-3 vote in favour of holding the rate at the level set last month.

The BoE’s September decision to hold the interest rate broke a spell of 14 consecutive rises in almost two years.

With the bank rate holding now for two months, borrowers will enjoy some relief amid financial insecurity brought on by high-interest rates and historically high inflation.

However, many mortgage holders are yet to experience the impact of the bank’s two-year-long cycle of interest rate hikes.

Those due to reach the end of their fixed-rate deals will have to pay higher bills in line with the high-interest rate.

Previous increases in bank rates will continue to affect consumption throughout the next three years.

Households with mortgages and other loans will spend less “materially” in response to higher loan costs, the MPC said.

Inflation Forecasts

The latest inflation figures showed that the Consumer Prices Index (CPI) rose by 6.7 percent in the 12 months to Sept. 2023. This is the same rate as in August.

The bank expects the CPI to fall further this year from the current 6.7 percent rate to around 4.5 percent. This would see the government achieve its target of halving inflation by the end of the year.

According to Chancellor Jeremy Hunt, the UK “has been more resilient than many expected.”

“Inflation is falling, wages are rising, and the economy is growing,” Mr. Hunt said on Thursday.

The BoE, however, warned that the inflation is still “too high.”

With the 2 percent target in mind, the bank said it will keep interest rates high enough “for long enough to ensure that we achieve our goal.”

The MPC predicted that the inflation rate will average about 3.3 percent next year, before returning to target by the end of 2025.

This decline is expected to be caused by lower energy, core goods and food price inflation. Beyond January, there is an expectation of some fall in services inflation.

The projected fall of inflation is conditioned on a bank rate of 5.25 percent until the end of the third quarter of 2024 and its gradual decline to 4.25 percent.

Recession Warning

A group of independent economists that shadow the Bank of England have called for interest rates to be cut.

The Institute of Economic Affairs analysts argued that the UK risks a recession caused by excessively high-interest rates.

“There is mounting evidence that the UK’s monetary policy is too tight and could lead to price deflation in a few years and potential recession in the interim. The Bank of England should act now by lowering interest rates,” said Trevor Williams, chair of the shadow MPC and former chief economist at Lloyds Bank.

Mr. Williams warned that the contracting money supply risks repeating the mistake that caused high inflation.

Last month, Mr. Hunt admitted that boosting the UK’s money supply–when the economy was hit by the consequences of lockdowns–triggered high inflation.

Governor Andrew Bailey, however, warned that it was “much too early” to think about cutting rates. He added that the BoE will watch “closely to see if further rate increases are needed.”

The MPC also predicted that the UK economy will flatline in 2024, a weaker result than the previously projected growth of 0.5 percent. In 2025, the bank expects a 0.4 percent four-quarter growth in real GDP.

The Treasury will outline plans to boost the economy in the Autumn Statement, due on Nov. 22. An economic and fiscal forecast by the Office of Budget Responsibility (OBR) will accompany the Chancellor’s statement.