The Bank of England has maintained its interest rate at 5%, with a signal that it might cut borrowing costs “gradually over time” should inflation remain subdued. Eight out of the nine Monetary Policy Committee (MPC) members voted to keep the UK base rate steady this Thursday.
Following a decrease from 5.25% last month, the first cut since 2020 providing some relief to borrowers, the central bank chose to hold the rates, signaling cautious optimism. Bank of England Governor Andrew Bailey remarked on Thursday: “Inflationary pressures have continued to ease since we cut interest rates in August.” He added, “The economy has been evolving broadly as we expected.”
Bailey also noted, “If that continues, we should be able to reduce rates gradually over time.” However, he warned, “But it’s vital that inflation stays low, so we need to be careful not to cut too fast or by too much.” The MPC, which leverages interest rates to temper inflation, emphasized its commitment to ensuring lasting inflationary pressures are addressed to stabilise price growth at the 2% target.
In light of official statistics, Consumer Prices Index (CPI) inflation hit the 2% mark in May and June, before slightly climbing to 2.2% in July and August. As lower energy bill effects diminish, the CPI is predicted to rise further over the year’s remainder. The eight members who voted to maintain the current rates cited a slowdown in price and wage increases, along with the UK economy growing as predicted, as evidence that a gradual approach to reducing rates was necessary. They also highlighted some global uncertainties, such as a decrease in demand for oil leading to falling prices, which called for caution.
Swati Dhingra, one member, voted for a rate reduction to 4.75%, arguing that inflation had been on a downward trajectory for a while, and it would take time for lower rates to impact the economy. Most economists and financial markets had anticipated the Bank to hold rates steady this month, with many expecting the next 0.25 percentage point cut to occur at the MPC’s November meeting.
In contrast, the Federal Reserve, America’s central bank, opted for a larger 0.5 percentage point cut in its interest rate on Wednesday, marking its first reduction in over four years. Ben Davies, Co-founder, of Newport-based Hexa Finance, said: “The Bank of England’s decision to keep the base rate at 5% means businesses will continue to navigate a landscape of higher borrowing costs. While this environment can be challenging, it’s important not to lose sight of the role finance plays in driving growth and sustaining operations.
He added, “Rather than holding back on investment, now is the time for businesses to take a closer look at their financial strategies. Careful planning and a focus on cash flow can help mitigate the impact of higher interest rates. Additionally, exploring the right finance options could open up opportunities for growth, even in uncertain times. While the cost of borrowing is higher right now than in recent years, it’s about finding the right balance between funding your plans and maintaining financial health. Businesses should stay informed, proactive, and ready to adapt as economic conditions evolve.”
The Bank of England’s decision to hold the interest rate at 5% while signaling potential gradual reductions underscores a cautious yet hopeful outlook for the UK economy. With inflationary pressures remaining a concern, the MPC is poised to act prudently to ensure price stability. Businesses are advised to carefully strategize their financial plans to navigate the current landscape of higher borrowing costs.