Bank of England Holds Interest Rates at 4%
The Bank of England has voted to keep interest rates at 4%, but a sharp disagreement in its monetary policy committee suggests a cut could come very soon. The nine members of the bank’s MPC voted 5-4 to keep borrowing costs unchanged given higher-than-average inflation in recent months.
Inflation and Interest Rates
The bank’s main task is to keep inflation – the rate at which prices have changed over the past year – as close to 2% as possible. All other things being equal, higher interest rates tend to cause prices to fall. However, consumer price index inflation was 3.8% in September, higher than anywhere else in the G7 group of developed countries.
Economic Forecasts
Releasing new economic forecasts, the bank said it expects inflation has now peaked and will fall in the coming months, settling at just over 2% in two years. The bank’s decision comes just three weeks before the budget is due to be released, leading some to believe it has held off on cutting interest rates to allow it to reassess the state of the economy after the budget proposal.
Budget and Economic Growth
The Chancellor has signaled she is likely to raise taxes and cut her spending plans – something that could further dampen economic growth. Governor Andrew Bailey said: "We left interest rates at 4% today. We still believe rates are on a gradual downward trend, but we need to be confident that inflation is on track to return to our 2% target before we cut them again."
Future Interest Rate Cuts
The bank said the tariffs had contributed to slightly lower inflation than expected, at least so far. It said it expects gross domestic product to grow by 1.2% next year and 1.6% the year after that. This is all based on the assumption that the bank will cut its interest rates from 4% to 3.5% next year. The fact that four MPC members voted to cut rates – and the governor’s indication that more cuts are on the way – will add to speculation that the bank could cut rates as early as next month, just before Christmas.
