LONDON: The Bank of England on Thursday held its key interest rate and warned it will remain high to tackle inflation, indicating in contrast with the Federal Reserve that cuts were unlikely any time soon.
The British central bank’s monetary policy committee (MPC) voted 6-3 in favour of keeping the rate at 5.25 percent, the highest level in more than 15 years, it said in a statement.
The US central bank had also frozen borrowing costs on Wednesday but signalled that it would start cutting rates next year and sparked a broad markets rally.
“Monetary policy would need to be sufficiently restrictive for sufficiently long to return inflation to the two percent target sustainably in the medium term,” stated the minutes from this week’s BoE gathering.
They added: “The committee continued to judge that monetary policy was likely to need to be restrictive for an extended period of time.”
Bank of England to hold its line against rate cut talk
UK inflation dropped sharply in October to 4.6 percent, but remains the highest level in the G7 rich nations and more than double the BoE’s 2.0-percent target rate. November data is due next Wednesday.
‘Still some way to go’
Governor Andrew Bailey, in a letter to finance minister Jeremy Hunt, added Thursday that there was “still some way to go” in policymakers’ efforts to drag inflation down.
Inflation had surged to a 41-year peak at 11.1 percent in October 2022, stoked by spiking energy prices after the invasion of Ukraine by major oil and gas producer Russia and sparking a cost-of-living crisis in Britain.
Six MPC members voted in favour of no change – but three called for an increase to 5.5 percent and cited “evidence of persistent inflationary pressures”.
The BoE had also frozen borrowing costs at its previous gatherings in September and November, snapping a series of 14 hikes, as inflation slowed.
The outlook darkened this week as official data showed the UK economy shrank by more than expected in October in a broad-based decline, hitting reverse as high interest rates took their toll.
Gross domestic product contracted 0.3 percent on sliding construction, manufacturing and services activity. That dashed market expectations for a milder decline of 0.1 percent and followed a 0.2-percent increase in September.
Added to the gloom, the economy flatlined in the three months to October, while other data showed UK unemployment steadied and wages growth retreated in October.
Hunt has meanwhile cautioned that a string of BoE rate hikes, aimed at dampening inflation, had impacted economic activity.
The BoE stated this month that its multiple rate-hikes would prolong a cost-of-living squeeze – but stressed UK retail banks could contain the fallout.
Retail banks tend to pass on BoE rate hikes, hitting customers whose home loans come with variable rates and those whose fixed-term deals are expiring.
The BoE began lifting its main interest rate from a record low of 0.1 percent at the end of 2021, when inflation started to creep higher as economies slowly emerged from Covid-19 lockdowns. The European Central Bank was due to announce its latest monetary policy decision at 1245 GMT