The Bank of England on Thursday kept interest rates at their highest level in 15 years, even as policymakers again disagreed over the best measures to combat high inflation.
Six members of the central bank’s nine-member interest rate committee voted to keep interest rates at 5.25 percent amid signs that inflation would continue to ease and the economy would weaken. However, they said tight monetary policy was needed for a “prolonged” period, a stronger stance than before, according to minutes from this week’s monetary policy meeting.
“Inflation is coming down,” Andrew Bailey, the bank’s governor, told reporters on Thursday. “And we expect it to continue to fall this year and next year.” Rate hikes are working, he said.
But the bank needs to ensure that the inflation rate, which stood at 6.7 percent in September, falls “fully” to its 2 percent target, he added, and so policymakers will “watch closely to see whether further rate hikes are necessary.” are”. ”
“There is absolutely no reason for complacency,” Mr Bailey said. “Inflation is still too high.”
As the UK prepares for this long period of high interest rates, the economic outlook has darkened.
The economy is expected to remain stagnant for much of the next two years, the bank said in forecasts accompanying the rate decision. Specifically, the banks’ forecast data would show that the economy stagnated in the third quarter of this year, grew by 0.1 percent in the last three months of the year and then remained flat next year and into 2025.
The forecasts also highlighted the challenge facing policymakers in addressing high inflation. The expectations for the inflation rate in 2024 and 2025 are now slightly higher than they were a few months ago. For example, inflation would slow to 3.4 percent by the end of next year, compared with a previous forecast of 2.8 percent.
Three committee members voted to raise interest rates by a quarter point to address the risks of “deeper entrenched inflation persistence,” according to meeting minutes. Although the economy weakened, household incomes rose due to lower inflation and indicators of economic performance remained positive, they said.
This was the second meeting in a row where interest rates were kept stable. This ended a nearly two-year series of interest rate hikes to combat stubbornly high inflation. At the last meeting at the end of September, a slim majority of five to four voted to keep the interest rates.
Thursday’s decision echoes decisions by the Federal Reserve on Wednesday and the European Central Bank last week to keep interest rates unchanged because of signs that tight monetary policy was cooling their economies and easing inflationary pressures. All of these central banks left open the possibility of further rate hikes, but have shifted their focus to how long rates will remain at these levels to ensure inflation returns to its 2 percent targets.
In Great Britain, the inflation rate has fallen to just under 7 percent from a high of around 11 percent a year ago. In September, inflation defied economists’ expectations of a further decline as a rise in fuel prices offset slowing food price growth.
Bank of England policymakers said there was a risk that inflation could be driven up by energy prices due to the conflict in the Middle East. However, so far there has been only a “relatively limited” increase in energy prices, the bank said.
Other measures of inflation pressures closely watched by policymakers have shown early signs of easing. Inflation in the services sector was slightly weaker than expected, while the labor market is easing with higher unemployment and fewer job vacancies.
However, the picture has been complicated for policymakers by a change in labor market data provided by the Office for National Statistics. Due to a decline in the number of households participating in surveys estimating the unemployment rate and other indicators, the Statistics Office’s latest labor market report relied on “experimental” data based on information on taxes and government benefits. These new measures “must be interpreted with caution”, the bank said, and Mr Bailey stressed that the bank had used a “wide range of data” on wages and employment to make judgments that influence interest rates.
Inflation is expected to fall to 4.9 percent in October as a cut in the price cap on household energy bills is expected to offset increases in other fuel costs, the bank said. And then the rate is expected to fall further by the end of the year, to around 4.6 percent. That would allow Prime Minister Rishi Sunak to keep his promise to halve inflation this year.
After that, it will take longer for inflation to reach the bank’s target again. Unless interest rates change again, inflation will not reach 2 percent until the end of 2025.
“It is far too early to be thinking about cutting rates,” said Mr. Bailey, who voted to keep rates stable.
The impact of high interest rates is likely to take an ever-increasing economic toll. Interest rates were raised from near zero at the end of 2021, an aggressive pace of tightening, but not even half of the impact has yet been felt in the economy, according to bank estimates. So far, the negative impact has been on the real estate market, where investment has slowed. It will take longer for corporate investment and private household consumption to decline.
The full impact of higher interest rates on economic output will not be felt until 2025, the bank said.