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Bank of England Holds Interest Rates at 15-Year Peak to Combat Inflation

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The Bank of England has decided to maintain interest rates at a 15-year peak as it continues to combat high inflation, which is currently the highest among the world’s major economies. Despite concerns over a potential recession and a stagnant economy in the coming years, the Bank of England has chosen to keep the Bank Rate at 5.25% for the second consecutive meeting after 14 consecutive increases. The bank has also emphasized that borrowing costs are likely to remain high, with only half of the impact of previous rate hikes having been felt in the economy so far.

The Monetary Policy Committee (MPC) voted 6-3 to keep the Bank Rate unchanged, in line with the expectations of economists in a Reuters poll. The Bank of England stated, “The MPC’s latest projections indicate that monetary policy is likely to need to be restrictive for an extended period of time. Further tightening in monetary policy would be required if there were evidence of more persistent inflationary pressure.” This follows the bank’s previous statement in September that rates would need to remain “sufficiently restrictive for sufficiently long.”

Governor Andrew Bailey emphasized that the recent decline in inflation, coupled with a weaker economic outlook, should not be seen as an indication that rate cuts are imminent. Instead, he suggested that another rate hike was a more likely possibility, stating, “We need to see inflation continuing to fall all the way to our 2% target. We’ve held rates unchanged this month, but we’ll be watching closely to see if further rate increases are needed. It’s much too early to be thinking about rate cuts.”

The decision to keep rates on hold aligns with the recent moves made by the European Central Bank and the U.S. Federal Reserve, who are also waiting to assess the impact of their rate hikes on curbing inflation. Policymakers are also monitoring the Middle East conflict for any signs of increased inflation resulting from rising oil and gas prices.

Despite the Bank of England’s efforts to control inflation, it remains more than three times the bank’s 2% target, although it has fallen from 11.1% a year ago to 6.7% in the most recent data. The bank now predicts that the British economy experienced no growth in the July-September period and expects growth of only 0.1% in the fourth quarter, with zero growth predicted for 2024 and a modest expansion of 0.25% in 2025. Inflation is projected to return to the 2% target by the end of 2025, approximately six months later than previously forecasted.

Investors believe that the Bank of England has reached the end of its rate hike cycle, given the risk of a recession. Prior to the recent announcement, market expectations were that interest rates would remain unchanged until at least August of next year, at which point they may start to be reduced. The Bank of England’s forecasts indicate that inflation will reach its 2% target in two years’ time based on current market expectations for the Bank Rate.

While the economy has slowed down and the impact of last year’s surge in gas prices has diminished, the Bank of England is closely monitoring strong wage growth, which could contribute to ongoing inflationary pressures. The bank has expressed some concerns about the accuracy of official labor market data due to low survey response rates. However, it anticipates that job growth has been weaker than previously thought and expects a cooling off of strong wage growth.

One positive aspect of the Bank of England’s assessment of the economy is its prediction of 4.6% inflation in the fourth quarter of 2023. This suggests that Prime Minister Rishi Sunak will fulfill his promise to voters of achieving price growth this year, ahead of the expected national election in 2024.

More detail via Yahoo Sports here… ( Image via Yahoo Sports )

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