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Bank of England Maintains Interest Rate at 5.25 Percent Following Two Years of Increases

The never-ending cycle of interest-rate increases started in December 2021, when the bank rate moved from 0.1 percent to 0.25 percent.

The Bank of England (BoE) has decided to keep interest rates on hold for the first time in nearly two years. This decision was reached by a slim majority of five–four votes from the BoE’s Monetary Policy Committee (MPC). The markets had predicted a rate increase to 5.5 percent, but the latest inflation figures may have influenced the BoE’s decision.

Inflation figures released prior to the vote showed a decrease from 6.8 percent to 6.7 percent. This could have played a role in the MPC members choosing to keep the interest rate unchanged. This is a contrast to the 14 previous occasions when they opted for an interest rate increase.

Andrew Bailey, the governor of the BoE, who voted for a hold, stated: “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.”

Never-Ending Cycle

The seemingly never-ending cycle of interest rate increases started in December 2021, when the bank rate moved from 0.1 percent to 0.25 percent. This was followed by almost two years of continuous hikes. However, this cycle has been temporarily paused after causing significant effects on households and businesses in the UK.

The government aims to combat high inflationary pressures and intends to halve inflation by the end of the year. Despite this effort, the inflation rate will still be around 5 percent, which exceeds the government’s target of two percent.

Though inflation has slightly eased in August, there is still “immense pressure on family budgets,” according to the government. The Federation of Small Businesses (FSB) believes that the interest rate plateau should be a permanent solution. Many small firms have suffered financially due to the Bank’s consecutive interest rate increases.
The Institute of Directors (IoD) has previously warned against high interest rates that worsen the economic outlook. The chief economist at the IoD, Kitty Ussher, said, “The Bank of England should now give its medicine time to work. The holy grail of a soft landing where we bring inflation down without causing a recession is still possible.”

Although the BoE has indicated that the interest rate will remain unchanged for a significant period of time, it does not mean that it has reached its peak.

Shadow chancellor Rachel Reeves highlights the impact of the BoE’s decision on mortgage payers in the UK. She stated, “Somebody who is coming up to remortgage their house today is looking at paying £220 pounds more a month than a year ago. So this is still a very challenging time for families and businesses with the cost of living crisis continues to bite.”

Homeowners on standard variable mortgage rates will be particularly affected by the BoE decision, and most people’s next mortgage deal will be more expensive. The demand for rental properties has increased, causing rental prices to rise by 5.5 percent in the year to August.

The UK’s GDP has declined in July, with a 0.5 percent decrease in services, production, and construction. The BoE expects GDP to only slightly rise in the third quarter. Additionally, underlying growth in the second half of 2023 is anticipated to be weaker than expected.

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