Bank of England keeps interest rates at 5.25%

The Bank of England’s Monetary Policy Committee met on 21st September and opted to hold interest rates at 5.25% following a surprise fall in inflation.

Economists at the bank voted 5-4 in favour of holding the rate at 5.25%, with those opposing the decision calling for a 0.25 percentage point rise. The decision was the first time the MPC has voted not to increase the Bank’s base rate since December 2021.

Ahead of Thursday’s decision, financial markets had been confident of a small increase in interest rates. However, the ONS unexpectedly revealed a slight fall in inflation in August which saw predictions change to roughly 50-50 between holding rates steady or a slight rise. Making adjustments to interest rates is the key tool available to the Bank of England to return inflation, currently 6.7%, to its 2% target level. Predictions by the Bank’s economists now expect inflation to return to 2% by the first half of 2025.

The Bank of England also revealed that it estimated UK GDP to have fallen 0.5% in July, and that growth would be slower than expected during the second half of 2023, further prompting the MPC to maintain the current level of interest rates, as making borrowing more expensive impacts the ability of businesses and consumers to spend money in the economy. The impact of rising interest rates on consumers, particularly those facing rapid rises in mortgage repayments, has seen demonstrators converge outside the Bank of England this morning to protest against further rate rises.

The Bank’s comments on its outlook for the UK economy have also seen the value of the pound fall against the US dollar to its lowest level in six months.

Other central banks in developed economies around the world have also made decisions on interest rates on the same day as in the UK (21st September). Across the North Sea, both Norway and Sweden have opted for a 0.25 percentage point rise to 4.25% and 4% respectively. Elsewhere in Europe, the Swiss National Bank has kept its interest rates held at 1.75%, defying predictions of a rise, while Turkey has raised its base interest rate by 5 percentage points to 30% as double-digit persists. The Taiwanese central bank has also held its interest rate at 1.875% as the export-reliant country faces an economic slowdown as a result of drops in consumer spending in the West.