The Bank of England left its reference interest rate at a maximum of 15 years and ruled out any possibility of giving in on its fight against inflation in the foreseeable future.
The British central bank’s monetary policy committee voted 6-3 to maintain the key rate at 5.25%. The dissidents pushed for another quarter-point increase to quell what they saw as persistent upward pressures on prices, according to minutes of the decision released Thursday.
The governor, Andrew Baileyand his colleagues agreed that a “restrictive” political stance for a “prolonged period” to curb the British inflation rate, which remains three times the target and the highest in the Group of Seven.
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The comments seemed to frustrate the expectations among investors that the Bank of England could cut rates in the second half of next year, around the time Prime Minister Rishi Sunak is expected to prepare for a general election.
“It is too early to think about rate cuts,” Bailey said in a statement released with the decision. “Higher interest rates are working and inflation is falling. We need inflation to continue falling until we reach our goal of 2%. “We have kept rates unchanged this month, but we will be watching closely to see if further rate increases are needed.”
The Bank of England’s forecasts emphasized this point and noted that inflation will return to target in early 2025 if rates remain unchangedat least half a year earlier than the estimate based on market assumptions for rate cuts starting in August.
Ben Bernanke, former chairman of the US Federal Reserve, attended the meeting as an observer, as part of his review of the Bank of England’s forecasts and communications. Bailey and the UK central bank have come under heavy criticism for not acting quickly enough against inflation before it rose to its highest level in four decades last year. Bernanke will make recommendations early next year.
Projections for the UK economy
While central bankers avoided predicting a technical recession, they noted that The UK economy will stagnate next year. The uncertainties in those estimates mean there is still a 50% chance of the recession that some analysts are already projecting.
The English central bank described the Gross domestic product profile as “broadly flat” and “moderate.” GDP is now projected to post zero growth in 2024, down from the 0.5% expansion previously forecast, and a paltry 0.25% gain in 2025. This year’s growth was estimated at 0.5%. %, without review since August.
Also Unemployment is expected to rise more rapidly and end this year at 4.3% instead of the 4.1% previously expected, as companies make more cuts to cope with higher rates. By the end of 2026, the Bank of England believes unemployment will reach 5.1%.
This will add to the difficulties faced by English central bankers in measuring the impact of rate increases on the economy. Officials estimate that just under half of its monetary tightening since December 2021 has trickled down to the economy. This is being felt most clearly in housing investment, as new construction starts have slowed. Business investment is also feeling the pressure, the central bank said. Consumer spending tends to take longer to react, he added, although he noted there had already been a drop in consumer confidence.
Concern about inflation
The monetary authority remains concerned about inflation, which has eased from a peak of 11.1% last year but remains uncomfortably strong, more than three times higher than the 2% target. Bailey and the majority of the nine members of the monetary policy committee noted that upward pressures on wages remain a concern and that “a further increase in the bank rate remains a possibility” if they persist, meeting minutes showed.
However, Inflation is expected to fall to 4.6% by the end of the yearmeaning Sunak should be able to claim victory in his goal of halving inflation over the course of the year.
Translated by Paulina Steffens.