Matthew Horwood/Getty Images
The Bank of England did not rule out further interest rate increases.
London CNN –
The Bank of England paused its historic interest rate hike campaign on Thursday for the first time in almost two years after inflation unexpectedly fell in August.
The decision leaves core borrowing costs for UK commercial banks at 5.25% – still the highest since February 2008, following the longest run of successive rises in key interest rates in at least a century. The Federal Reserve also left interest rates unchanged on Wednesday, as did the Swiss central bank on Thursday.
The news will provide some relief to British households struggling to repay their mortgages and could lead to cuts in mortgage rates in the coming weeks.
The decision to take a break was a knife-edge vote. Five members of the Bank of England’s monetary policy committee supported maintaining the current interest rate, while four members favored an increase of a quarter of a percentage point to 5.5%.
However, the central bank did not rule out further interest rate hikes and indicated that borrowing costs would need to be kept high over a longer period of time to ensure a sustained decline in inflation.
“Inflation is still not where it should be and there is absolutely no reason for complacency,” Gov. Andrew Bailey said in a video sent to the bank Website. “We will closely monitor whether further increases are necessary. And we need to keep interest rates high enough long enough to make sure we get our jobs done.”
Despite this hawkish tone, many analysts do not expect further rate hikes.
“The bank’s job is done,” said Paul Dales, chief UK economist at Capital Economics. However, he added that interest rates would remain at their current levels for longer than investors expected.
For households struggling with rising prices and high borrowing costs, the Bank of England’s decision will be a “huge relief,” said Alice Haine, personal finance analyst at Bestinvest, an online investment platform.
“The really good news is that interest rates may have finally peaked in the current tightening cycle, giving consumers a glimmer of hope that extremely high borrowing costs are finally coming to an end,” she added.
Hina Bhudia, partner at Knight Frank Finance, a mortgage broker, noted that the decision, along with better inflation numbers, would “pave the way for lenders to make further mortgage rate cuts in the coming weeks.”
Mortgage rates in the UK have fallen in recent weeks but are still well above their levels a year ago. The average cost of a two-year fixed-rate mortgage was 6.58% on Thursday, according to financial products comparison site Moneyfacts. In comparison, the rate was 4.24% last September and just 2.38% in September 2021.
The likelihood of a Bank of England pause rose sharply on Wednesday after data showed U.K. consumer prices rose 6.7% in August compared with a year earlier.
Economists polled by Portal had forecast inflation would rise to 7% from 6.8% in July due to higher oil prices.
The main reasons for the negative surprise were lower hotel and airfares and a smaller increase in food prices than in August 2022, according to the Office for National Statistics.
Core inflation, which ignores fluctuating food and energy costs, and services inflation also slowed significantly, which Martin Beck, chief economic adviser at the EY ITEM Club, said suggests “a turning point in the underlying inflation has been achieved”.
A recent slowdown in economic activity in the UK and signs of a weakening labor market could drive inflation further lower.
After a slight increase in the second quarter, gross domestic product contracted 0.5% in July, with output falling in most sectors.
And although wages are still rising at a record pace, unemployment has risen and the number of job openings has fallen below 1 million for the first time in two years.
Meanwhile, the number of corporate bankruptcies rose 19% year-on-year in August to more than 2,300. This is higher than the levels seen during government support measures during the pandemic and also higher than pre-pandemic numbers.
“There is a touch of underlying weakness,” Capital Economics’ Dales said of the July GDP data. “Given that the dampening effect of higher interest rates is now increasing, it would make sense for underlying economic growth to moderate.”