The Bank of England left interest rates unchanged on Thursday, the first time in almost two years that it opted not to raise rates during a long battle against persistently high inflation.
A day earlier, data showed that inflation in Britain had unexpectedly slowed. Central bank authorities kept interest rates at 5.25 percent, the highest since early 2008, pausing after 14 consecutive rate increases. But it was a close decision; only five of the bank’s nine rate-setters voted to leave rates unchanged.
“Inflation has fallen sharply in recent months and we believe it will continue to do so,” central bank governor Andrew Bailey said in a statement. “But there is no room for complacency.” He was among the narrow majority in favor of keeping rates stable.
Interest rates must remain “sufficiently restrictive for long enough” to return inflation to the central bank’s 2 percent target, according to minutes of this week’s monetary policy meeting. Officials also left the door open to further rate increases, “should there be evidence of more persistent inflationary pressures,” the minutes said.
The Bank of England’s pause comes during a long and tumultuous fight against inflation. The central bank began its rate-hike cycle in December 2021, raising rates from near zero to levels last seen during the 2008 financial crisis. In that time, inflation has spiked faster than investors expected. economists and has remained high, even though it has fallen. from its peak of around 11 percent in October.
The authorities have come under significant public pressure for not maintaining greater control over inflation and not foreseeing the problem in their forecasts. The central bank has said that Ben Bernanke, former chairman of the US Federal Reserve, will lead a review of the bank’s forecasting processes.
This week, some news favored the central bank. Consumer prices rose 6.7 percent in August compared to the previous year, slightly below the previous month. Economists expected the rate to rise due to a global rise in energy prices. Instead, slower food price inflation and other factors lowered the overall inflation rate.
Better still for the central bank, measures of domestic inflationary pressures also slowed. The annual rate of core inflation, which excludes energy and food costs that tend to be more volatile and influenced by international markets, fell to 6.2 percent in August, from 6.9 percent the previous month. And services inflation, which is heavily influenced by companies’ wage costs, slowed more than the central bank predicted.
As inflation rates fall across much of the world and economies weaken, in part due to aggressive policy tightening by central banks, officials are trying to carefully calibrate the right level of interest rates. Several central banks are shifting their focus from how much to raise interest rates to how long they will need to stay elevated.
On Wednesday, the Federal Reserve left interest rates unchangedbut officials suggested they hoped to make another rate hike before the end of 2023. Last week, European Central Bank officials said they were probably done raising interest ratesbased on his assessment of the economy, and would keep rates at high levels “for a long enough period.”
Before the Bank of England’s decision was announced, there was almost an equal chance that the central bank would raise or maintain rates, depending on operations in financial markets. In the end, it was a split decision among the nine members of the central bank’s rate-setting committee. The five policymakers who voted to keep rates steady, including Bailey, cited lower-than-expected inflation rates and signs the labor market was easing, with unemployment rising in recent months and fewer jobs. of vacant jobs.
The other four, including the committee’s newest member, Megan Greene, voted to raise rates by a quarter point, arguing that the economy’s resilience, high wage growth and other indicators showed there was evidence of more persistent inflationary pressures.
One of the challenges facing the Bank of England is the surprising strength of the economy, which has avoided recession as consumers have continued to spend despite rising prices and high interest rates. Recently, Britain’s statistics office said that The economy had recovered much more strongly after the pandemic lockdowns. than was initially estimated.
But as the effects of high interest rates are felt across more of the economy, the outlook is bleaker. The Organization for Economic Co-operation and Development said this week it expected the British economy to grow 0.3 percent this year, one of the slowest among advanced economies, and 0.8 percent next year.
So far, the impact of high interest rates has been felt mainly in the real estate sector, where homeowners face increases in their mortgage payments and property investment has fallen.
The Bank of England also announced Thursday that it will continue to sell its reserves of government bonds, acquired since the financial crisis. Over the next year, the bank plans to reduce its bond holdings by 100 billion pounds, or about $123 billion, to 658 billion pounds.