UK interest rates kept steady despite downward inflation trend

UK interest rates kept steady despite downward inflation trend

The Monetary Policy Committee (MPC) at the Bank of England (BOE) arrived at an unusual three-way split on Thursday, as members disagreed on the best path forward for interest rate cuts.

Six members of the MPC voted to keep borrowing costs stable at 5.25%, two voted for an 0.25% rate raise, and one advocated for a 0.25% cut.

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«The three-way split on the MPC reflects the challenge of balancing still persistent inflationary pressures and the need to maintain tight policy for now, while also acknowledging the decline in inflation and low growth,» said Jens Larsen, director at Global Macro-Geoeconomics for Eurasia Group.

Despite a surprise inflationary rise in December, prices have been increasing at a slower rate in the UK, a promising sign for policy makers.

On Thursday, the BOE forecast that inflation is set to hit its 2% target in the second quarter of this year, although it warns the figure is likely to rise to 2.75% at the end of 2024, due to persistent inflationary pressures.

Asked about rate cuts last month, Governor Andrew Bailey was hawkish, claiming there was «some way to go» before a cut to borrowing costs could be delivered.

At Thursday’s meeting, Bailey said that «things are moving in the right direction», but again showed his hesitancy to move too quickly.

«We need to see more evidence that inflation is set to fall all the way to the 2% target, and stay there, before we can lower interest rates,» he said.

Over the coming months, the BOE will be closely monitoring a number of economic indicators such as labour market conditions and wage growth.

Earlier this month, the Office for National Statistics (ONS) reported that salaries were rising at a slower rate in the UK and job vacancies were falling, as high borrowing costs were making it more difficult for businesses to hire new staff.

This is seen as a promising sign that interest rates are effectively curbing inflation, although some warn that the BOE must start cutting rates before the UK reaches a critical stagnation point.

«As expected, the BOE has held the base rate, but this smacks of the fear of getting it wrong,» said Mark Dyason, founder of Edinburgh Mortgage Advice.

«It is a shame that our economic leaders can’t be more dynamic and look to drive the economy forward. Inflation is nowhere near the problem it was but the cost of living is an issue,» he added.

Swati Dhingra, the only member of the MPC to vote for a rate cut, also cautioned the BOE against overtightening, as there is often a delay before monetary policy becomes effective.

The UK’s decision to hold rates steady follows the lead of the US Federal Reserve, which on Wednesday made a no-change announcement, following strong GDP results.

Last week, the European Central Bank also announced that rates would remain unchanged, although cooling inflation and stagnant economic growth across the eurozone are bringing policy makers under increasing pressure.


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