The Bank of England decided to keep interest rates unchanged on Thursday, breaking a two-year trend of rate increases as it continues to combat high inflation.
This decision came after unexpected data showed a slowdown in inflation in August. The central bank’s policymakers maintained the interest rates at 5.25 percent, the highest level since early 2008, pausing after 14 consecutive rate hikes.
Andrew Bailey, the governor of the central bank, stated, “Inflation has fallen significantly in recent months, and we expect this trend to continue. However, we must remain vigilant.”
According to the minutes of the policy meeting, interest rates need to remain “sufficiently restrictive for sufficiently long” to bring inflation back to the central bank’s 2 percent target. The minutes also acknowledged the possibility of further rate increases if there is evidence of persistent inflationary pressures.
The Bank of England’s decision to pause reflects its ongoing struggle against inflation, which officials have warned is not yet resolved. Since December 2021, the central bank has raised rates from near zero to levels last seen during the 2008 financial crisis. Despite these increases, inflation has remained high, although it has decreased from its peak of around 11 percent in October.
Policymakers have faced criticism for not effectively addressing inflation and failing to predict the issue in their forecasts. The central bank has announced a review led by Ben Bernanke, the former U.S. Federal Reserve chair, to examine its forecasting processes.
However, recent news has provided some support for the central bank. In August, consumer prices rose by 6.7 percent year-on-year, slightly lower than the previous month. The rate was expected to rise due to global energy price increases, but other factors, such as slower food price inflation, contributed to the overall decrease in inflation.
Additionally, domestic inflationary pressures have also eased. Core inflation, which excludes energy and food costs, decreased to 6.2 percent in August from 6.9 percent the previous month. Services inflation, influenced by wage costs, also slowed more than anticipated, even when accounting for the greater volatility of travel services during the summer.
As inflation rates decline globally, central banks are carefully considering the appropriate level and duration of interest rates in order to combat inflation without causing unnecessary economic hardship. Both the Federal Reserve and the European Central Bank have made recent statements regarding interest rates and their plans for the future.
Prior to the Bank of England’s announcement, financial market trading indicated an almost even chance of a rate increase or maintaining the status quo. In the end, the central bank’s rate-setting committee had a split decision, with five members voting to keep rates steady and four members advocating for a quarter-point rate increase based on evidence of persistent inflationary pressures.