The Bank of England left interest rates unchanged on Thursday, the first time in nearly two years that it has chosen not to raise interest rates during a long-running battle against stubbornly high inflation.
The previous day, data showed that inflation in Britain slowed unexpectedly. Central bank policymakers kept interest rates at 5.25 percent, the highest level since early 2008, and paused after 14 consecutive interest rate increases. But it was a close decision. Only five of the bank’s nine rate makers voted to maintain interest rates.
“Inflation has fallen significantly in recent months, and we believe it will continue to do so,” central bank governor Andrew Bailey said in a statement. “But there is no room for complacency.” He was among the narrow majority in favor of keeping interest rates steady.
Interest rates must remain “sufficiently restrained for a sufficient period” long enough to bring inflation back to the central bank’s 2% target, according to minutes of this week’s policy meeting. Officials left the door open for further interest rate increases “if there is evidence of more persistent inflationary pressures,” the meeting minutes said.
The Bank of England’s pause comes during a long and turbulent struggle against inflation. The central bank began its cycle of interest rate hikes in December 2021, raising interest rates from near zero to highs last seen during the 2008 financial crisis. At that time, inflation rose faster than economists expected and remained high, although falling. From its peak of about 11 percent in October.
Policy makers have come under significant public pressure for not having a firm grip on inflation and for not anticipating the problem in their forecasts. The central bank said that Ben Bernanke, former head of the US Federal Reserve, will lead a review of the bank’s forecasting operations.
This week, some news came in favor of the central bank. Consumer prices rose 6.7 percent in August from a year earlier, down slightly from the previous month. Economists had expected the rate to rise due to the global rise in energy prices. Instead, a slowdown in food price inflation and other factors led to a lower overall inflation rate.
Even better for the central bank is that measures of domestic inflationary pressures have also slowed. The annual rate of core inflation, which excludes energy and food costs that tend to be more volatile and affected by international markets, fell to 6.2 percent in August, from 6.9 percent the previous month. Services inflation, which is strongly influenced by corporate wage costs, also slowed more than the central bank expected.
With inflation rates low in most parts of the world and economies weak, partly due to aggressive policy tightening by central banks, officials are trying to carefully calibrate the appropriate level of interest rates. Many central banks are shifting their focus from how much to raise interest rates to how long they will need to stay high.
On Wednesday, the Federal Reserve left interest rates unchanged, but officials indicated they expect to make another rate increase before the end of 2023. Last week, policymakers at the European Central Bank said they were likely finished raising interest rates, based on On their evaluation. economy, and will keep interest rates at high levels “for a sufficiently long time.”
Before the BoE’s decision was announced, there was an almost equal chance that the central bank would raise or maintain interest rates, depending on trading in the financial markets. In the end, the decision was divided among the nine members of the central bank’s interest rate-setting committee. The five policymakers who voted to keep interest rates steady, including Mr. Bailey, cited lower-than-expected inflation rates and signs that the labor market is slowing, with unemployment rising in recent months and the number of job openings falling.
The other four, including the committee’s newest member, Megan Green, voted to raise interest rates by a quarter of a percentage point, saying the economy’s resilience, high wage growth and other indicators showed there was evidence of more persistent inflationary pressures.
One challenge facing the Bank of England is the surprising strength of the economy, which has avoided a recession as consumers continue to spend despite rising prices and rising interest rates. Recently, the British Bureau of Statistics said The economy recovered more strongly after the pandemic lockdowns Than was initially estimated.
But as the effects of higher interest rates are felt in more of the economy, the outlook is bleaker. The Organization for Economic Co-operation and Development said this week that it expects the British economy to grow 0.3 percent this year, one of the slowest in advanced economies, and 0.8 percent next year.
So far, the impact of higher interest rates has been felt primarily in the housing sector, with homeowners facing jumps in their mortgage payments and investment in housing declining.
The Bank of England also announced on Thursday that it will continue selling its stock of government bonds, which it has acquired since the financial crisis. Over the next year, the bank plans to reduce its bond holdings by 100 billion pounds, or about 123 billion dollars, to 658 billion pounds.
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