The Bank of England made a significant decision on Thursday, breaking its pattern of increasing interest rates amidst a slowing British economy.
However, it underscored that the recent dip in inflation should not be taken for granted.
Following an unexpected deceleration in the rapid rise of prices in the UK, the Bank of England’s Monetary Policy Committee (MPC) narrowly voted 5-4 in favor of maintaining the Bank Rate at 5.25%.
Four of its members, namely Jon Cunliffe, Megan Greene, Jonathan Haskel, and Catherine Mann, advocated for an increase to 5.5%.
This marked the first time since December 2021 that the Bank of England refrained from raising borrowing costs.
The MPC acknowledged, “There are increasing signs of some impact of tighter monetary policy on the labor market and on momentum in the real economy more generally.”
Additionally, the committee reduced its economic growth forecast for the July-September period from 0.4% in August to a meager 0.1% while also identifying weaknesses in the housing market.
Expectations for the remainder of the year’s growth were also tempered.
Despite record growth in workers’ pay, the central bank expressed concerns that this was not supported by other labor market indicators, suggesting an impending slowdown.
The Bank of England anticipated a significant drop in Consumer Price Index (CPI) inflation in the near term, primarily due to lower annual energy inflation, though oil prices were expected to exert upward pressure. Services inflation, on the other hand, was predicted to remain high.
The decision to halt rate hikes coincided with a similar move by the U.S. Federal Reserve. Just last week, the European Central Bank raised rates but hinted that it might be their last increase for now.
The MPC, however, reiterated its readiness to raise borrowing costs again if inflationary pressures persisted.
Governor Andrew Bailey welcomed the recent decline in inflation but cautioned against complacency.
He emphasized the need to ensure inflation returns to its 2% target from the elevated 6.7% in August.
In a separate announcement, the MPC decided to accelerate its program to reduce the substantial stockpile of government bonds acquired over the past 15 years, with plans to reduce it by £100 billion over the next 12 months through a combination of sales and allowing bonds to mature.
This would bring the total to £658 billion, a faster reduction compared to the £80 billion decrease over the past year.