The Bank of England (BoE) on Thursday, September 21, held its key interest rate at 5.25 per cent following 14 hikes in a row to fight soaring inflation. The decision to freeze the borrowing costs came one day after official data revealed a cooling of consumer price rises in Britain. The decision comes to the relief of millions of homeowners who are facing higher mortgage rates.
BoE has joined the US Federal Reserve in avoiding another rate hike after Fed Chair Jerome Powell-led Federal Open Market Committee (FOMC) on Wednesday held the overnight interest rate unchanged at 5.25 per cent - 5.50 per cent.
The BoE's monetary policy committee (MPC) decided in a tight 5-4 vote to maintain its key rate at 5.25 per cent, the highest level in more than 15 years. Governor Andrew Bailey, who had the casting vote, chose to hold. It was the first time since December 2021 that the BoE did not increase borrowing costs.
The UK central bank said that past rate hikes were having an impact: “There are increasing signs of some impact of tighter monetary policy on the labor market and on momentum in the real economy more general.”
The BOE, however, signaled that policy was only on pause and it would respond if inflation, which remains more than three times above the 2 per cent target, does not fall as expected. The MPC forecasts consumer-price inflation to hit the target in the second quarter of 2025.
In Britain, the consumer prices index slowed to 6.7 per cent in August from 6.8 percent in July, data revealed on the eve of the BoE rate decision. This was the lowest inflation figure since February 2022 and confounded expectations for an acceleration to 7.1 per cent on higher energy prices.
"CPI inflation is expected to fall significantly further in the near term, reflecting lower annual energy inflation, despite the renewed upward pressure from oil prices," the BoE said.
The BoE cut the gross domestic product (GDP) growth forecast for the July-September period to just 0.1 per cent from August's forecast of 0.4 per cent and noted clear signs of weakness in the housing market. The underlying growth in the second half of 2023 is also likely to be weaker than the 0.25 per cent expected in August.
In the short term, the bank expects a “significant” fall in inflation “despite the renewed upward pressure from oil prices” due to declining energy and goods inflation.
Britain's economy has been hampered by the highest inflation rate in the Group of Seven even as growth remains fragile, raising the risk for the BoE of pushing it into a recession with its 14 back-to-back rate hikes to date.
The BoE will step up the pace it’s unwinding its quantitative easing portfolio of bonds, reversing a vast stimulus program it deployed through the financial crisis and pandemic.
The MPC said its balance sheet of government debt will shrink by £100 billion in the second year of so-called quantitative tightening through bonds maturing or being sold. This is a faster pace than the £80 billion reduction in gilts in the first year scaling back the portfolio, according to Bloomberg.
The move signals that officials led by Governor Andrew Bailey are determined to normalize policy settings after the emergency program was put in place in 2009. It presents a challenge for the UK Treasury, which is selling more bonds to finance its debt and has the added burden of having to pay for losses the BOE incurs through the program.
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