The Bank of England has opted to keep interest rates unchanged at 5.25% amid a surprising fall in UK inflation. This move follows the decision made by the US Federal Reserve to also pause interest rate increases. The decision has come as a relief to many homeowners who have been facing higher mortgage rates following almost two years of rate hikes. Central banks across the globe are now seemingly nearing the end of an aggressive rate-hiking cycle, which was implemented to combat inflation caused by the rebound from the COVID-19 pandemic and Russia’s invasion of Ukraine.
The unexpected drop in inflation to 6.7% in August, the lowest level since Russia’s invasion in February 2022, played a significant role in influencing the Bank of England’s decision. However, it is important to note that inflation remains considerably higher than the bank’s target rate of 2% and higher than that of any other major economy within the Group of Seven.
Bank Governor Andrew Bailey described the decline in inflation as “welcome,” but emphasized that the bank would be prepared to raise rates again if inflation did not continue to fall as predicted. Bailey stated, “We’ll be watching closely to see if further increases are needed, and we will need to keep interest rates high enough for long enough to ensure that we get the job done.”
Out of the nine members of the bank’s Monetary Policy Committee, four voted in favor of a rate hike. Higher interest rates have contributed to curbing inflation globally, as they increase the cost of borrowing and reduce spending. While most economies have avoided recession, economic growth remains subdued in many parts of the world, leading to concerns that the British economy could experience a decline in output in the coming months.
Senior economist at abrdn, Luke Bartholomew, suggested that interest rates may have reached their peak, stating, “While the bank has suggested it could hike again if inflation proves to be more than expected, it is likely that interest rates have now peaked. The economy is deteriorating rapidly, and we expect a recession later this year.”
Despite the decision to maintain the current interest rates, the cost-of-living crisis in the UK is far from over. Inflation, although lower than anticipated, remains relatively high, along with food and energy costs. Moreover, due to the time lag between actual rate hikes and mortgage rates, many homeowners and renters have yet to experience increased housing costs.
Unlike the US, where most homeowners secure mortgage rates for only a few years, British homeowners face higher borrowing costs as their deals expire, reflecting the significant rise in interest rates over the past couple of years. Lewis Shaw, founder of mortgage adviser Shaw Financial Services, expressed relief over the Bank of England’s decision but cautioned about the future, as he highlighted that over 2 million households are set to renew their mortgages at higher rates by the end of 2024.
Over the past few years, the Bank of England, in line with other central banks, has aggressively raised interest rates from near zero in order to counteract rising prices caused initially by supply chain disruptions during the pandemic and subsequently by Russia’s invasion of Ukraine, which drove up food and energy costs. UK inflation reached a peak of 11.1% in October 2022. With the easing of inflation, it appears that the rate-hiking cycle is approaching its end.
The Swiss National Bank has also maintained its rates, but Sweden’s and Norway’s central banks have proceeded with quarter-point hikes, and Turkey has implemented another significant increase. Last week, the European Central Bank, responsible for setting interest rates for the 20 European Union countries that use the euro currency, suggested that its tenth consecutive hike could be its last.
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