The Bank of England left interest rates unchanged on Thursday, the first time in almost two years that it has opted not to raise interest rates in its long-running battle against stubbornly high inflation.
The decision came a day after data showed inflation in Britain had unexpectedly slowed. Central bank policymakers left interest rates at 5.25 percent, the highest since early 2008, pausing after 14 consecutive rate hikes. But it was a close call; Only five of the bank’s nine rate setters voted to keep rates the same.
“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 reason for complacency.” He was part of the narrow majority that supported keeping interest rates the same.
According to minutes from this week’s policy meeting, interest rates must remain restrictive “for long enough” to bring inflation back to the central bank’s 2 percent target. Officials also left the door open for further rate hikes “if there were indications of more persistent inflationary pressures,” the minutes said.
The Bank of England’s pause comes during a long and turbulent battle 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. During that time, inflation has risen faster than economists expected and remained high, although declining from its peak of about 11 percent in October.
Policymakers are under significant public pressure for failing to keep inflation under tighter control and for failing to anticipate the problem in their forecasts. The central bank has announced that former Federal Reserve Chairman Ben Bernanke will lead a review of the bank’s forecasting processes.
This week some news favored the central bank. Consumer prices rose 6.7 percent year-on-year in August, down slightly from the previous month. Economists had expected the rate to rise due to a global rise in energy prices. Instead, slower food price inflation and other factors led to a decline in the overall inflation rate.
Even better for the central bank, measurements of domestic inflation pressures also slowed. The annual core inflation rate, 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 in the previous month. And inflation in the services sector, which is heavily influenced by corporate labor costs, slowed more than the central bank forecast.
As inflation rates fall across much of the world and economies weaken, partly due to aggressive monetary 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 high interest rates should be to how long they need to stay elevated.
On Wednesday, the Federal Reserve left interest rates unchanged, but officials indicated they expect another rate hike before the end of 2023. Last week, European Central Bank policymakers said they believed they were likely done raising interest rates in the economy and would keep interest rates high for “a sufficiently long period of time.”
Before the Bank of England’s decision was announced, there was a near-even chance that the central bank would raise or maintain interest rates, according to trading in financial markets. Ultimately, it was a split decision among the nine members of the central bank’s interest rate committee. The five policymakers who voted to keep interest rates on hold, including Mr. Bailey, cited lower-than-expected inflation rates and signs that the labor market was loosening, with unemployment rising in recent months and fewer job vacancies to fill.
The other four, including the committee’s newest member, Megan Greene, voted for a quarter-point rate hike, arguing that the economy’s resilience, high wage growth and other indicators suggested there were signs 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. The British Statistics Office recently said that the economy had recovered significantly more strongly from the pandemic lockdowns than originally expected.
But as the effects of high interest rates are felt in more parts of the economy, the outlook is bleaker. The Organization for Economic Co-operation and Development said this week that it expects Britain’s economy to grow by 0.3 percent this year, making it one of the slowest developed countries, and by 0.8 percent next year.
So far, the impact of high interest rates has been felt primarily in the housing sector, where homeowners are facing rising mortgage payments and housing investment has declined.
The Bank of England also announced on Thursday that it would continue selling its holdings 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.