Interest charges reside: Bank of England holds rates of interest and downgrades progress in blow for Labour
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The Bank of England held interest rates steady at 4.75 per cent on Thursday after it was revealed that inflation in November rose to 2.6 per cent, above the central bank’s target.
The move keeps borrowing costs high for mortgage holders and also the government.
The central bank also expects no economic growth for the final three months of the year, further dampening Chancellor Rachel Reeves’s hopes of jump-starting the economy.
Bank Governor Andrew Beiley said: “We’ve held interest rates today following two cuts since the summer. We need to make sure we meet the 2 per cent inflation target on a sustained basis. We think a gradual approach to future interest rate cuts remains right, but with the heightened uncertainty in the economy we can’t commit to when or by how much we will cut rates in the coming year.”
The Bank’s Monetary Policy Committee voted by a majority of 6–3 to maintain the rate at 4.75 per cent. Three members preferred to reduce Bank Rate by 0.25 percentage points, to 4.5 per cent.
It comes after the Office for National Statistics revealed inflation had risen to 2.6 per cent from 2.3 per cent, pushed higher by pricier petrol and clothing.
The central bank uses higher interest rates as a tool to try and tame inflation, forcing families to spend more on borrowing rather than pushing up the prices of goods.
Another pressure on inflation comes from rising wages. Pay packets are now growing at 5.2 per cent, up from 4.9 per cent three months ago, according to data from the Office for National Statistics released earlier this week.
Money market traders have pushed back their expectation of a rate cut to May. Previous market activity suggested that a cut could have come in March.
Commercial lenders like high street banks and building societies use the bank base rate as a guide on how much to charge borrowers and how much to reward savers.
While borrowers get much of the attention, savers are also in for a rougher ride and should take a look at locking in good savings rates before they disappear, says Myron Jobson, Senior Personal Finance Analyst, at interactive investor.
He said: “The best savings rates appear to be on borrowed time. Barring any economic shocks, the only likely direction for interest rates is downward, which means Britons are set to earn even less on their savings in the future.
“The simple message for savers is to act quickly to secure the best deals before they disappear. Those who can afford to lock away their money for at least five years or more should consider investing for the potential of long-term, inflation-beating returns that far outstrip current savings rates.”
Anna Leach, Chief Economist of the Institute of Directors, said 2025 could be a “tricky year” for growth.
She said: “Inflationary pressures have now shifted for the coming year, with wage growth and price-setting expected to lend more persistence to inflation. But it’s unclear whether stronger public sector spending will fill the gap left by a weaker private sector.
“Geo-political developments add further uncertainty to the outlook and markets will remain sensitive to any upward pressure on government borrowing, adding volatility to borrowing costs for businesses and households. As the new government seeks to change the growth trajectory for the UK, 2025 is set to be a tricky year, with a lot hanging on how well it spends the additional money it has allocated itself.”
The Bank should have cut rates, according to the Institute for Public Policy Research think tank.
Reacting to today’s decision by the Bank of England’s Monetary Policy Committee to hold interest rates at 4.75%, Carsten Jung, principal research fellow and head of macroeconomics at IPPR, said:
“With growth stalling and the labour market slowing down, the Bank of England should have cut interest rates today. Given the Bank now expects zero growth in last quarter of this year, the Bank’s policy stance is simply too tight.
“Inflation is broadly on track with expectations. It was always expected to go up slightly toward the end of this year. But price pressures should now ease more quickly given weaker than expected growth. The Committee should have put more emphasis on this.”
Chancellor of the Exchequer Rachel Reeves has responded to rates being held at 4.75 per cent.
She said: “I know families are still struggling with high costs. “We want to put more money in the pockets of working people, but that is only possible if inflation is stable and I fully back the Bank of England to achieve that. “Improving living standards across the country is our number one focus, and is why I chose to protect working people’s pay slips from tax rises, froze fuel duty and increased the national living wage for three million people.”
Higher rates for longer are a blow to borrowers, said Suren Thiru, ICAEW Economics Director, although the main news could be the Bank backing itself into a corner. If inflation keeps creeping up and growth stays low – that’s stagflation – it could make raising rates tricky.
“The bank’s decision to keep interest rates on hold, while expected, will still come as a palpable blow to households battling with burdensome mortgage bills and businesses facing a jump in costs following the autumn budget.
“The split vote decision and the dovish tone of the minutes suggest that a February interest rate cut remains very much in play, if not yet a done deal.
“The Bank of England risks backing itself into a corner over the pace of policy loosening because, with inflation likely to drift higher, the timing of future interest rate cuts could become increasingly complex, especially if stagflation fears become reality.
“Against this backdrop, rate setters are likely to take baby steps in cutting interest rates over the next year, particularly in the face of growing domestic and international inflation risks.”
Jonny Black, Chief Commercial & Strategy Officer at abrdn adviser, said:
“Predictably, the Bank of England has held interest rates at 4.75 per cent in its final announcement of 2024. However, what lies ahead is what matters and many are already looking to 2025 after Andrew Bailey confirmed more cuts are on the cards.
“Exactly what this will look like will depend on inflation and the performance of the economy as we head into the New Year but, for now, it’s evident that a steady decline could be seen soon.
“As ever, interest rates decide the fate of many homeowners looking at remortgaging and can impact the decision-making of those sitting on cash savings too. For those planning for the year ahead – whether that be large milestone moments like buying or moving home, or re-evaluating savings and investments – advisers can help navigate finances through the lens of the wider economic landscape. They provide clarity and can help clients understand decisions, ensuring financial strategies remain robust against any twists and turns ahead.”
The Bank of England said that its Monetary Policy Committee voted by a majority of 6–3 to maintain Bank Rate at 4.75 per cent. Three members preferred to reduce Bank Rate by 0.25 percentage points, to 4.5 per cent. It said: “Since the MPC’s previous meeting, twelve-month CPI inflation has increased to 2.6% in November from 1.7% in September. This was slightly higher than previous expectations, owing in large part to stronger inflation in core goods and food. Services consumer price inflation has remained elevated. Headline CPI inflation is expected to continue to rise slightly in the near term. Although household inflation expectations have largely normalised, some indicators have increased recently.”
The Bank of England has held interest rates steady at 4.75 per cent.
Traders are busy unwinding bets of a Bank of England rate cut in February, which would be the next time policymakers meet to set rates.
It’s now evenly balanced after traders’ bets indicated an 80 per cent likelihood only a week ago.
Meanwhile, the pound has regained some ground against the dollar. Sterling climbed 0.7 per cent to $1.26.
The FTSE 100 has had a wobble ahead of the looming interest rate decision, due in a little under an hour. It has slid 1.4 per cent to 8,085.82. The index of 100 biggest companies listed in London has been on a downslide for the last month.
Government borrowing costs have also climbed. The Labour government does have some skin in this game, since the BoE’s decision will inform how much the Treasury will have to pay to borrow. Yields – the interest available should you buy a bond in the secondary market right now – have risen to 4.604 per cent. At the start of the month they were closer to 4.2 per cent.
