Bank of England keeps interest rates on hold at 5.25% in narrow vote

The Bank of England has kept interest rates on hold for the first time in almost two years in a knife-edge decision underscoring the risks to the economy, leaving borrowing costs at 5.25% and warning that rates will remain high to tackle inflation.

In a critical week for the economy, the Bank’s monetary policy committee (MPC) voted by a narrow majority to halt the cycle of rate hikes – 14 consecutive rises since the end of 2021 – after figures on Wednesday showed a surprise fall in inflation in August.

Exposing a split within the Bank’s most senior ranks, four members of the MPC – including the outgoing deputy governor Jon Cunliffe – were outvoted in pushing for a quarter-point rise. He joined three of the independent economists on the nine-strong panel advocating for tougher action to bring inflation back to more sustainable levels.

The Bank’s governor, Andrew Bailey, who voted for a hold, said: “Inflation has fallen a lot in recent months, and we think it will continue to do so. That’s welcome news. But there is no room for complacency. We need to be sure inflation returns to normal and we will continue to take the decisions necessary to do just that.”

Financial markets had been finely balanced in the run-up to the decision, with the City pricing in a near-even chance of a quarter-point increase. Many economists expect the Bank’s to keep rates unchanged for a prolonged period to prevent persistent inflationary pressures becoming embedded in the economy.

The pound was down 0.7%, or nearly a cent, against the dollar after the decision was announced, at $1.2260 – its lowest since March.

The narrow decision to hold interest rates marks the first time since borrowing costs have been left unchanged since November 2021. A month later the Bank of England embarked on the toughest rate-hiking cycle in the UK in decades to lift borrowing costs from a record low of 0.1% to their highest level since the 2008 financial crisis.

Sounding the alarm over the strength of the economy, the Bank said it now expected gross domestic product to rise only slightly in the third quarter. Underlying growth in the second half of this year would also be weaker than expected.

The Bank, the chancellor, Jeremy Hunt, and City investors were wrong-footed by the unexpected fall in UK inflation in August, to 6.7%, while separate figures showed a cooling jobs market and weaker levels of economic activity.

Central banks around the world are approaching the end of the rate-hiking cycle, which started after the inflation shock triggered by the Covid pandemic and Russia’s war in Ukraine. The US Federal Reserve left borrowing costs unchanged on Wednesday, while the European Central Bank raised interest rates last week in a move many economists said could mark its final increase.

UK inflation is expected to take until the summer of 2025 to drop back to the Bank’s 2% target. The MPC said it would need to keep interest rates “restrictive for sufficiently long” to ensure inflation returned to the target sustainably.

Leaving the widest possible room open to raise interest rates again to tackle inflation if required, the committee warned: “Further tightening in monetary policy would be required if there were evidence of more persistent inflationary pressures.”

The split on the MPC reflected heightened uncertainty over the future strength of growth as the impact of previous rate increases rippled through the economy. Millions of mortgage holders are yet to refinance from cheaper deals agreed before the Bank started raising borrowing costs, a ticking time bomb for households in the run-up to the next election.

Cunliffe’s decision to vote against his colleagues is considered unusual because the five Bank insiders on the MPC typically move as a bloc, while the four external members more often vote in the minority.

The deputy governor, who will leave the committee after completing his final term at the Bank this autumn, was joined in the minority by the independent economists Megan Greene, Jonathan Haskel and Catherine Mann. The other external member, Swati Dhingra, voted with the majority to leave rates on hold.

The Bank also moved to accelerate the sale of UK government bonds held on its balance sheet because of its quantitative easing programme, increasing disposals from £80bn a year to £100bn. Holding a peak of £895bn of bonds, the electronic money-printing policy was used to support jobs and growth after the 2008 financial crisis, 2016 Brexit vote and during the pandemic.

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