The Bank of England and Governor Andrew Bailey have held the base interest rate at 5.25% for the fourth time running.
The Bank of England held its base interest rate at 5.25% for the fourth time in a row on Thurrsday, but its Monetary Policy Committe was divided on the decision.
It means the rate remains at a 15-year high for the first part of the new year, as the Bank moves cautiously in its battle with inflation. The Bank’s Monetary Policy Committee voted by a majority of 6–3 to maintain the rate at 5.25%. Two members preferred to increase the rate by 0.25%, to 5.5%. One member voted to reduce the rate by 0.25%, to 5%.
Andrew Bailey, the Governor of the Bank of England (main picture), and Huw Pill, Chief Economist, are both believed to favour a hold in the rate. Thursday’s decision was widely expcted even though there was a surprise increase in inflation during December to 4% from 3.9%.
Most City analysts believe the inflation trend is firmly downwards, with some even saying the Government will reach its target of 2% by April.
Bank of England says rates 'under review' as it treads carefully on cuts
LONDON (Reuters) - The Bank of England kept interest rates at a nearly 16-year high on Thursday but softened its stance about the possibility of cutting them and one of its policymakers cast the first vote for a reduction in borrowing costs since 2020. BoE Governor Andrew Bailey said "inflation was moving in the right direction" shortly after the Monetary Policy Committee ditched its previous warning that rates could rise again and instead said "borrowing costs would be kept "under review."
The MPC split three ways on the right course for policy with six of its nine members voting to keep rates at 5.25%, Jonathan Haskel and Catherine Mann voting for a 0.25% point hike and Swati Dhingra backing a cut of the same size.
It marked the first time since August 2008 - early in the global financial crisis - that different policymakers have voted to move interest rates up and down at the same meeting.
Economists polled by Reuters had mostly expected only one policymaker to vote for a rate rise, and for the remainder to vote to keep rates on hold.
The pound and British government bond yields rose modestly after the BoE announcement. Investors slightly reined in their bets on the extent of cuts to Bank Rate over 2024 but still saw four reductions for the year. "The balance of argument is edging slowly towards rate cuts, but the Bank cannot risk cutting rates and then having to raise them again as inflation revives," Ian Stewart, chief economist at Deloitte, said.
Bailey stressed that "the BoE remained cautious and inflation falling to its 2% target would not be job done. We need to see more evidence that inflation is set to fall all the way to the 2% target, and stay there, before we can lower interest rates."
But in a softening of its language on the outlook for interest rates, the BoE dropped its warning that "further tightening" would be required if more persistent inflation pressure emerged.
Instead, the BoE said "it would keep under review for how long Bank Rate should be maintained at its current level."
Officials at the U.S. Federal Reserve and European Central Bank have been more explicit that rate cuts are on the agenda. Late on Wednesday the Fed said its rates had peaked and would move lower later this year.
INFLATION TO FALL, WAGE GROWTH STILL STRONG
The BoE reiterated that policy would need to stay "restrictive for sufficiently long" - even as it slashed its inflation forecast for the coming months. However, considerably higher wage growth set Britain apart from its peers in driving inflation pressure over the longer term, the BoE said.
Annual consumer price inflation now looks likely to return to 2% in the second quarter of this year, albeit briefly, in a sharp downgrade of the BoE's near-term outlook for price growth compared with November's projections. But the medium-term forecast - based on a much lower market path for interest rates than in November - showed inflation would rise back above 2% in the third quarter of 2024 and not return to target until late 2026, a year later than the BoE had forecast in November.
The BoE stuck to its view that Britain's economy will struggle to generate much economic growth in the quarters ahead, despite a modest upgrade to the annual growth projections.
In a small boost for finance minister Jeremy Hunt, the BoE judged that his tax cuts announced in November would boost British economic output slightly in the years ahead.
But the central bank largely maintained its forecast for weak household income growth after tax and inflation, with the cost of living a key issue ahead of a likely national election this year.
Households' living standards have fallen over the past two years due to high inflation, contributing to the electoral challenge facing Prime Minister Rishi Sunak.
Hunt is preparing a budget to be delivered on March 6 that is likely to include tax cuts in a pre-election bid to woo voters back to the Conservative Party, which is lagging badly behind the opposition Labour Party in opinion polls.
Earlier this week the International Monetary Fund warned Hunt not to cut taxes, due to high levels of public debt and growing demands on services, and trimmed its outlook for British economic growth in 2025.
Base rate hold provides ‘further relief for home buyers and sellers’
Housing market confidence could get a further boost from the continued freeze on the Bank of England base rate, it has been suggested. Mortgage professionals said that while homeowners coming up to remortgage should still prepare themselves for a hike in their payments, the shock may not be as big as it could have been last year.
Nathan Emerson, Propertymark CEO, said on the latest decision by the Bank of England to hold interest rates “it is positive to see that many people intending to buy their first home or sell their current one won’t be hindered by an increase in interest rates. However, it is now time for the UK Government to continue to curb inflation so that interest rates can fall further to help ease the backlash this has had on people’s affordability. They should make 2024 the year consumers start to enjoy some confidence again following three years of disruption to the economy.”
Jason Ferrando, chief executive officer of easyMoney said “the Bank of England has been careful not to run before it can walk where our current economic recovery is concerned and so tthursday’s decision was largely expected despite a sharp fall in inflation this week. This is probably the correct decision and while it won’t immediately ease the burden of the nation’s borrowers, it should help boost sentiment based on the expectation that we could now see a reduction in interest rates on the horizon.”
Chief executive officer of Octane Capital, Jonathan Samuels, said “it appears that the Bank of England’s slow but steady approach to managing the economy has finally started to pay off, with inflation falling sharply this week. Generally speaking, this decision to keep the base rate held should bring further positivity for the economy and the property market, in particular. But while it’s likely to stoke the fires with respect to the increasing number of buyers returning to the market in recent weeks, they are best advised to proceed with caution. Swap rates have been gradually climbing so far this year in anticipation of today’s decision and so an ongoing degree of certainty where the base rate is concerned doesn’t necessarily mean lower mortgage rates are guaranteed.”
Matt Smith, Rightmove’s mortgage expert said “as painful as rate rises have been for many people, there are increasing signs that Base Rate rises are having a real impact on the economy, and inflation is heading in the right direction. Another hold in the Base Rate today also shows that the Bank will also be cautious not to overshoot Base Rate rises, and will be keen to maintain the current stability. The market appears more robust than last year, evidenced by the fact that the surprise uptick in inflation a couple of weeks ago didn’t derail the downward trend of mortgage rates. The big picture remains the same – the Base Rate is unlikely to rise further, and mortgage rates have some room to come down further before settling.
It’s been a promising start to the year for housing market activity, with more people than this time last year listing their home for sale, looking to buy, or getting a Mortgage in Principle to see what they can afford. For anyone thinking of moving but still holding back from taking action, the slight uptick in average rates in some lower Loan-To-Value brackets this week is a reminder that average rates won’t fall forever and mortgage rates appear to be settling after significant drops at the start of January.”
Director of Benham and Reeves, Marc von Grundherr, commented “the property market has made considerable strides forward since the Bank of England first held the base rate at 5.25% and so today’s decision will only bring more certainty to buyers, helping to further cultivate the positive market landscape that has been developing. Yes, interest rates remain at their highest in over 15 years, however, this isn’t the cause of a diminished appetite for homeownership. Increasing rates, market uncertainty and ever changing mortgage offers are the key deterrent and buyers can now rest assured that the only way is down with regard to interest rates over the coming year.”