Bank of England holds interest rates at 5.25%

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The Bank of England has held interest rates at 5.25 per cent after a knife-edge vote that is likely to signal the peak of borrowing costs after almost two years of rate rises.

Thursday’s decision sent the pound to its lowest level in six months against the dollar as investors pared back expectations for further rate rises. Mortgage rates are also expected to fall further after the decision, following cuts by several lenders this week.

After better than expected inflation data a day before, the bank’s Monetary Policy Committee was split five to four in favour of leaving rates unchanged, with BoE governor Andrew Bailey casting the final and decisive vote.

It was the first pause after 14 consecutive rate rises since the start of the tightening cycle in December 2021.

On Wednesday, the US Federal Reserve also voted to keep its benchmark rate steady after its own series of rises took borrowing costs to their highest level since the financial crisis.

As price rises slow after the worst inflation shock in 40 years, the world’s leading central banks have steered clear of declaring victory over inflation but are all signalling that rates are at or near their peak.

Although the MPC made little comment about its future actions, the majority backing the decision to hold indicated that further rate rises were unlikely to be necessary in the coming months.

The five MPC members wrote of the importance that the current level of rates be “maintained” — rather than increased — until progress had been made in bringing inflation down to the BoE’s 2 per cent target.

Yael Selfin, chief economist at KPMG UK, said that interest rates had “potentially reached their peak in this cycle”, while noting that BoE officials would be monitoring data for reassurance that policy was restrictive enough to bring inflation down.

Mortgage prices have already been declining since the middle of summer and lenders including NatWest, TSB and Nationwide announced cuts this week while several providers offered new five-year fixed rates below 5 per cent.

But swaps markets still give roughly a 70 per cent chance of a final quarter point rise in the BoE’s benchmark rate to 5.5 per cent before March next year.

Sterling, which had already weakened after Wednesday’s inflation data, extended its losses to trade down 0.4 per cent after hitting a six-month low of $1.2239 against the dollar.  

Real estate stocks briefly gained after the MPC vote, with Barratt Developments and Berkeley Group rising about 2 per cent before giving up most of their gains.

The MPC decision was a piece of good economic news for Prime Minister Rishi Sunak as he sought to take charge of the political agenda by delaying key net zero targets.

It also followed Wednesday’s unexpected dip in inflation to 6.7 per cent for August, which put Sunak on course to hit his target of “halving inflation” this year.

Bailey said inflation would continue to fall but cautioned there was “no room for complacency” and BoE officials did not wholly rule out another rate rise in the months to come. “Further tightening in monetary policy would be required if there was evidence of more persistent inflationary pressures,” the MPC said.

The minority of members who had supported increasing rates countered that there was evidence of such pressures, saying that higher borrowing costs would “address the risks of more deeply embedded inflation persistence”.

The committee also unanimously agreed to raise the pace of its quantitative tightening process for the year ahead from £80bn in 2022-23 to £100bn in 2023-24.  

The MPC said it considered interest rates to be the active tool of monetary policy, adding that the effect of its asset sales on borrowing costs was “modest”.