The Bank of England is keeping interest rates stable and sees ‘some way to go’ on inflation
The Bank of England kept interest rates at a 15-year high on Thursday as policymakers sought to ease inflationary pressures even amid signs of an economic slowdown.
The bank’s policy rate remained at 5.25 percent after a faster-than-expected decline in inflation, which fell below 5 percent in October. Still, inflation was more than double the central bank’s target of 2 percent.
For some policymakers and analysts, it is worrying that the percentage is also high compared to neighboring European countries, and that workers on average suffer from this relatively rapid wage growth, causing prices in the service sector to rise. Indications that domestic price pressures remain quite strong mean traders do not expect the central bank to cut interest rates until the middle of next year.
“We have come a long way this year and successive rate hikes have helped reduce inflation,” Andrew Bailey, the bank’s governor, said in a statement. “But there is still a way to go.”
Globally, the fight against high inflation has entered a new phase as price growth peaked last year. Now central bankers are focusing on how to reduce inflation to their targets while managing the negative effects of past rate hikes. As the global economy weakens, policymakers are alert to when they may need to cut interest rates, but are cautious about signaling that these cuts will come too soon and risk rekindling inflationary pressures.
On Wednesday, the US Federal Reserve kept interest rates steady, but policymakers indicated there could be three cuts next year. Later on Thursday, the European Central Bank is also expected to leave interest rates unchanged.
Reflecting the more challenging situation in Britain, where growth is weak but inflationary pressures still persist, the Bank of England gave no indication that interest rate cuts were imminent.
A growing weakness in the UK economy is becoming increasingly apparent as household spending falters while residential investment shrinks. The economy shrank by 0.3 percent in October, data published on Wednesday showed. Monthly measures of economic growth can be volatile, but data from the Office for National Statistics shows that the economy has been about the same size over the past year and a half.
The central bank expects the economy to flatten from now until 2025. But the bank does not expect inflation to return to the 2 percent target until the end of 2025.
The minutes of this week’s meeting of Bank of England policymakers highlighted the possibility that rates could rise again, saying “further tightening” would be necessary if there were indications of “more persistent inflationary pressures.”
Policymakers at the bank remain divided over the best way to ensure that inflation falls quickly and sustainably. Six members of the bank’s nine-member rate-setting committee, including Mr Bailey, voted to maintain the rate.
But the three others voted in favor of raising rates by a quarter point, arguing it was necessary to reduce the risk of “more deeply embedded” inflation, the minutes show. Despite weak economic growth, household incomes improved, adjusted for inflation, and the labor market was tight. There was evidence of more persistent inflation as wage growth was above comfortable to meet the inflation target and price growth in the services sector was “elevated”, the three policymakers said.