Bank of England Keeps Interest Rate Unchanged at 5.25% Amid Unexpected Drop in Inflation

The Bank of England, in a crucial decision, has chosen to maintain the current interest rate at 5.25%. This decision comes after a surprise decline in inflation that exceeded expectations.

The monetary policy committee (MPC) of the Bank voted 5-4, with the narrowest of margins, to keep the borrowing cost unchanged, defying market expectations. Prior to the release of the inflation data on Wednesday, the likelihood of a quarter percentage point rate increase was estimated at 80%. However, this probability dropped to just below 50% by this morning.

This decision marks the end of the longest consecutive period of rate hikes in recent history, as the MPC had raised rates in 14 consecutive meetings. The last time the MPC chose to leave interest rates unchanged was in November 2021. However, the fact that four committee members voted for a rate increase – Jon Cunliffe, Megan Greene, Jonathan Haskel, and Catherine Mann – may indicate that the Bank might consider raising rates again in the coming months.

Additionally, the Bank has decided to continue its quantitative easing reversal program, which involves selling government bonds and injecting money into the economy.

Analysis: This freeze will still be painful

Ed Conway

Economics & data editor

@EdConwaySky

It is arguably the most exciting non-event in recent economic history. Today, for the first time since late 2021, the Bank of England voted to leave borrowing costs unchanged.

Now in some senses, this is indeed a non-event. Interest rates are no higher than they were yesterday, but the cost of borrowing remains painfully high for many households.

Those due to refinance their mortgages in the coming months will still see a sharp increase in their rates compared with two or five years ago. The cost of living crisis is still with us.

Read Ed’s full analysis here.

The Bank has announced its plan to sell an additional £100bn worth of bonds over the next year, resulting in a reduction of its total asset holdings to £658bn.

Andrew Bailey, the Bank of England governor, expressed relief over the significant decline in inflation, but also emphasized the importance of remaining vigilant. Bailey stated, “Inflation has fallen a lot in recent months, and we think it will continue to do so. That’s welcome news. But there is no room for complacency. We need to be sure inflation returns to normal and we will continue to take the decisions necessary to do just that.”

Prior to the meeting, economists had differing opinions on whether the prospect of declining inflation would outweigh the Bank’s concerns about rising wage inflation. Both of these factors have been identified as crucial indicators to monitor. Ultimately, the five members who voted in favor of keeping rates unchanged believed that “the latest developments meant that the judgement to keep Bank Rate unchanged at this meeting rather than increase it was finely balanced. Conditions were likely to warrant a restrictive policy stance being maintained until material progress had been made in returning inflation to the 2 percent target.” This suggests that there is still a significant likelihood of further rate hikes in the future, and even if there aren’t, interest rates are unlikely to decrease rapidly.

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