At 5.25%, Bank of England holds key interest rates at 15-year high-mark despite economic worries

The Bank of England (BoE) has kept borrowing rates unchanged despite mounting worries over the state of the British economy. The central bank on Thursday, December 14, left its main interest rate at a 15-year high of 5.25 per cent, where it has stood since August following the end of nearly two years of hikes.

While the interest rate increases have helped in the battle against inflation, the squeeze on consumer spending, primarily through higher mortgage rates, has weighed on British economic growth. Six of the nine members of the Monetary Policy Committee voted to keep rates on hold while three wanted a quarter-point hike — a clear signal to the markets that rate cuts are not on the agenda yet.

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Gross domestic product (GDP) contracted 0.3 per cent on sliding construction, manufacturing and services activity. That dashed market expectations for a milder decline of 0.1 per cent and followed a 0.2-per cent increase in September. 

The economy flatlined in the three months to October, while other data showed UK unemployment steadied and wages growth retreated in October. The BoE stated this month that its multiple rate-hikes would prolong a cost-of-living squeeze -- but stressed UK retail banks could contain the fallout.

On Wednesday, the US Federal Reserve also kept rates on hold. The European Central Bank (ECB), which sets policy for the 20 European Union countries that use the euro currency, is expected to do the same later today. The Fed has signaled it expects to make three interest rate cuts next year, while market expectations also foresee cuts by the ECB.

The BoE is widely thought to be further away from cutting rates than its counterparts, with inflation in the UK higher than in the US or in the eurozone. The BoE has managed to get inflation down from a four-decade high of over 11 per cent. Inflation, as measured by the consumer price index, stood at 4.6 per cent in the year to October, still too high for comfort.

Governor Andrew Bailey, in a letter to finance minister Jeremy Hunt, added that there was "still some way to go" in policymakers' efforts to drag inflation down. Inflation had surged to a 41-year peak at 11.1 per cent in October 2022, stoked by spiking energy prices after the invasion of Ukraine by major oil and gas producer Russia and sparking a cost-of-living crisis in Britain.

The BoE began lifting its main interest rate from a record low of 0.1 percent at the end of 2021, when inflation started to creep higher as economies slowly emerged from COVID-19 lockdowns.