The Bank of England maintains interest rates after UK inflation slows

The Bank of England kept interest rates at their highest level in 16 years, even as inflation in Britain fell to the slowest pace in more than two years.

On Thursday, policymakers at the central bank left their policy interest rate at 5.25 percent for the fifth time in a row. The decision to hold rates was widely expected, but analysts were monitoring the votes of the nine-member rate-setting committee to see if a consensus emerged on whether price increases were under control and when rate cuts could begin.

Eight members of the committee voted to maintain rates, with the two policymakers who voted for higher rates last month abandoning their position. One member voted for a rate reduction.

The Bank of England kept interest rates on hold “because we need to be sure that inflation returns to our 2 percent target and stays there,” Andrew Bailey, the central bank governor, said in a statement. “We are not yet at the point where we can lower interest rates, but things are moving in the right direction.”

Monetary policy had to be restrictive “for an extended period,” according to the minutes of this week’s meeting. But, officials added, policies could remain restrictive even after interest rates were cut, providing the clearest signal yet that rate cuts were coming.

For much of last year, inflation in Britain has been stubbornly high. Prices rose faster than in neighboring European countries and a tight labor market pushed wages up. These concerns have recently begun to subside. Data released on Wednesday showed annual inflation fell to 3.4 percent last month, down from 4 percent in January and the lowest rate since September 2021.

Economists expect inflation to slow sharply in coming months, possibly below the central bank’s target of 2 percent, as household energy bills fall. Core inflation, which excludes food and energy prices that tend to be more volatile and influenced by international prices, fell to 4.5 percent last month, the lowest in more than a year. At the same time, the weakness of the economy has put pressure on the central bank to cut interest rates. Britain ended in recession last year.

Policymakers have warned that the impact of lower energy prices will eventually fade and inflation will return to higher levels. Rather than just hitting 2 percent, policymakers want to be sure they can get inflation back to that level over a long period of time before cutting rates.

So officials have been keeping a close eye on wage data to see if growing pay packages create longer-term inflationary pressures. Annual wage growth, excluding bonuses, rose 6.1 percent in the three months to January, the latest data showed.

The debate over the timing of the interest rate cuts is occupying policymakers at several major central banks. On Wednesday, U.S. Federal Reserve officials kept interest rates steady but said they still expected to make several rate cuts this year. The same day, European Central Bank President Christine Lagarde said euro zone policymakers would have more data, especially on wages, by June to give them confidence that inflation was under control, fueling speculation that interest rate cuts could begin in the future. summer.

Earlier on Thursday, the Swiss National Bank unexpectedly cut interest rates, the first move among central banks in advanced economies. Inflation peaked in Switzerland at around 3.5 percent, much lower than elsewhere in Europe, and has been below 2 percent for several months. The strength of the Swiss franc was also a consideration in the decision to cut rates, officials said. A strong currency can hinder the economy by making exports more expensive. After the interest rate move, the franc fell sharply against the euro and the dollar.

Officials at the Bank of England have been divided for some time over how to tackle high inflation. Swati Dhingra, who voted again for a rate cut, has argued that the weakness of the British economy means inflation would fall and that the latest rate hikes may have been excessive and needed to be reversed more forcefully.

Last month, Jonathan Haskel and Catherine L. Mann voted in favor of a rate hike, highlighting tight labor markets and the risk of entrenched inflationary pressures. But they both abandoned that position this month and joined the majority in holding rates steady.

Still, all eight members who voted to hold rates said they needed to see more evidence about the persistence of inflation before easing the bank’s policy.