The Bank of England has given hard pressed indebted entrepreneurs a breather by pausing interest rate hikes. This brings to an end a sequence of 14 successive interest rate hikes.
The Bank of England kept interest rates unchanged at 5.25%.
Inflation figures exceed expectation
One reason for this is better-than-expected inflation figures this month.
At 6.7% in August, inflation is falling towards the 5% level that the BoE predicts for the coming months – and which British Prime Minister Rishi Sunak has promised to voters ahead of an election expected next year.
But it remains more than three times the BoE’s 2% target and the highest in the Group of Seven economies.
Bailey and other officials have stressed in recent weeks that, while they might be close to reaching the peak of their run of rate hikes, they would probably have to keep borrowing costs at high levels for a period, dashing hopes of quick cuts.
Whether it raises rates one more time or not, the challenge for the BoE is likely to be to convince investors that it will stick to its guns and not rush to cut rates even as Britain’s already fragile economy shows signs of weakening.
Views from the experts
“While the BoE will no doubt try to project a ‘higher for longer’ message, as the ECB has since its rate hike last week, history tells us that once the peak is in, forward rates move notably lower,” Dominic Bunning, head of European FX Research at HSBC, said in a note to clients.
The BoE is alarmed that wages have so far defied the slowdown in the broader economy and are rising at a record pace, threatening to thwart its attempts to bring inflation down.
British inflation is almost double the rate in the United States, where the Federal Reserve on Wednesday kept borrowing costs on hold.
Last week, the European Central Bank raised rates to a record high but signalled that it was likely to pause.
As well as its decision on rates, the central bank is expected to give details of the next phase of programme to reduce the stockpile of government bonds which it amassed over a decade and a half to help the economy during the global financial crisis and the COVID-19 pandemic.
