Bank of England holds interest rates at 5.25% as economy slows

The Bank of England has said Britain is facing a tougher job to crush persistently high inflation than other advanced nations, as it kept interest rates on hold at the highest level since the 2008 financial crisis.

Pushing back against expectations in financial markets for a deep round of interest rate cuts next year, the central bank said there was still a long way to go before it could declare victory on inflation, despite a worsening outlook for the UK’s stagnant economy.

Setting itself apart from the US Federal Reserve, which signalled on Wednesday that it expected to cut interest rates three times next year, the Bank said rates would need to remain at high levels for “sufficiently long” to return inflation back to its 2% target set by the government.

Threadneedle Street said that unlike in the US and the eurozone, measures of pay growth and service sector inflation had fallen back by less, while the dangers of high inflation becoming entrenched in the British economy remained skewed to the upside.

Andrew Bailey, the Bank’s governor, said it had “come a long way this year” after successive rate increases had helped to bring inflation down from over 10% in January to 4.6% in October. “But there is still some way to go,” he warned. “We’ll continue to watch the data closely, and take the decisions necessary to get inflation all the way back to 2%.”

Voting by a majority of six to three, the Bank’s monetary policy committee (MPC) left interest rates unchanged at 5.25% for a third consecutive time. Borrowing costs remain at the highest level in 15 years. Three members voted to raise rates to 5.5%.

However, in the minutes of its meeting, which was finalised before the Fed announced its decision, the panel said the choice had been a difficult one, between leaving rates on hold and restarting its most aggressive cycle of rate increases in decades.

“The decision whether to increase or to maintain Bank rate at this meeting was again finely balanced between the risks of not tightening policy enough when underlying inflationary pressures could prove more persistent, and the risks of tightening policy too much given the impact of policy that was still to come through,” it said.

Warning that Britain stood apart from other major economies, the MPC said in its minutes: “Relative to developments in the United States and the euro area, measures of wage inflation were considerably higher in the United Kingdom and services price inflation had fallen back by far less.”

Jonathan Haskel, Catherine Mann and Megan Greene – were the three members outvoted in pushing for an increase to 5.5%. The other six, including Bailey, viewed previous increases as sufficient to tame inflation because the full impact was yet to feed through to the economy.

The Bank in September paused its round of 14 consecutive rate hikes, from a record low of 0.1% in December 2021, while warning that borrowing costs would need to remain high for a lengthy period to tame inflation.

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Expectations have been growing for a round of rate cuts next year as the UK economy comes under sustained pressure from high borrowing costs, with a cooling labour market and worsening growth prospects. The latest official data showed the UK economy shrank unexpectedly by 0.3% in October.

Financial markets on Thursday were pricing in five UK rate cuts by the end of 2024 to 4%.

With households and businesses under pressure from higher borrowing costs, the Bank said it expected GDP growth to be broadly flat at the end of this year and over the coming quarters.

However, Bailey said that a “resilient UK economy and tight labour market” meant there was a danger of persistent inflationary pressures becoming entrenched despite a slump in pay growth over recent months.