Sunday, July 21, 2024

Interest rates held at 5.25%

The Bank of England has held interest rates at 5.25%, for the fourth time.

With aims to meet the 2% inflation target, the Bank’s Monetary Policy Committee (MPC) has voted by a majority of 6–3 to maintain Bank Rate at 5.25%.

Two members preferred to increase Bank Rate by 0.25 percentage points, to 5.5%. One member preferred to reduce Bank Rate by 0.25 percentage points, to 5%.

A statement from the Bank of England says: “The Committee voted to maintain Bank Rate at 5.25%. Headline CPI inflation has fallen back relatively sharply. The restrictive stance of monetary policy is weighing on activity in the real economy and is leading to a looser labour market. In the Committee’s February forecast, the risks to inflation are more balanced. Although services price inflation and wage growth have fallen by somewhat more than expected, key indicators of inflation persistence remain elevated.

“As a result, monetary policy will need to remain restrictive for sufficiently long to return inflation to the 2% target sustainably in the medium term in line with the MPC’s remit. The Committee has judged since last autumn that monetary policy needs to be restrictive for an extended period of time until the risk of inflation becoming embedded above the 2% target dissipates.”

The Bank is anticipating a temporary fall to 2% for inflation in the second quarter of 2024, but note that it is likely to rise again after.

Anna Leach, CBI deputy chief economist, said: “The decision by the Bank of England to hold interest rates at 5.25% will come as a relief to households holding back on spending and businesses that have pressed pause on investment.

“While inflation is following a downward trend towards the 2% target, it’s not clear whether rates will follow suit. Relatively high wage inflation alongside an uptick in services inflation in December means that a rate cut before the summer is increasingly unlikely to materialise.

“However, that won’t stop pressure piling onto the Bank of England to reduce rates as weakness in the economy persists. A rebound in growth in November following the previous month’s decline is encouraging but masks the overall picture of a flatlining economy, still at risk of technical recession.

“The stakes are high for business bearing the brunt of higher borrowing costs and soft demand. They desperately need certainty on monetary policy alongside a package of measures from government to kickstart productivity and growth.

“The Spring Budget in a General Election year is the perfect opportunity for politicians to support credible solutions. The CBI’s Budget recommendations have the potential to unlock business investment, including a Net Zero Carbon Plan, a globally competitive R&D Tax Credits scheme as well as capping the increase in the business rate multiplier in England for another year.”

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