UK not out of woods on inflation, says Bank of England as interest rates held
UK interest rates have been held at 4% as the Bank of England warned that inflationary pressures remain. Governor Andrew Bailey cautioned that the country is “not out of the woods yet” when it comes to rising prices.
Markets had not expected a rate cut, given that inflation is still running at nearly twice the Bank’s 2% target. The Bank continues to forecast that inflation will eventually return to its target level but has not indicated when it might reduce borrowing costs.
Alongside its rates decision, the Bank announced that it would slow the pace of reducing the government debt it holds, citing recent turbulence in the financial markets.
Since price rises began easing last year, the Bank has lowered interest rates five times since August. However, inflation has been climbing again since April, driven partly by higher food costs. While the Monetary Policy Committee (MPC) voted by a majority to hold rates at 4%, two of its nine members backed a cut to 3.75%. The MPC will meet twice more this year but has signalled it wants clearer evidence that inflationary pressures are easing before cutting rates further.
The Bank also revealed that Chancellor Rachel Reeves will face tighter constraints when she sets out her November Budget. The headroom she has against her self-imposed tax and spending limits will be reduced, reflecting updated economic forecasts.
During the financial crisis and the pandemic, the Bank bought £875 billion worth of government bonds to stabilise the economy. Since then, it has been unwinding this position at a rate of around £100 billion a year. On Thursday, it confirmed that from October the pace of reduction will slow to £70 billion annually.
Mr Bailey said the move would allow the Bank to pursue its longer-term plans “while minimising the effect on gilt market conditions.”
