Bank of England holds interest rates at 5%

The Bank of England (BoE) has kept interest rates at 5% but investors predict two cuts will happen before the end of the year, with the first expected to take place in November.

Swati Dhingra, the most dovish member of the committee, voted against the move and wanted to cut rates to 4.75%.

The other eight members — Andrew Bailey, Sarah Breeden, Megan Greene, Clare Lombardelli, Catherine L Mann, Huw Pill, Dave Ramsden and Alan Taylor — all voted to hold rates unchanged.

This decision follows a report showing UK inflation, which tracks the rise in consumer prices, remained at 2.2% last month, slightly above the BoE’s 2% target.

Read more: Pound hits two and a half-year high after Bank of England holds interest rate

Governor Bailey said: “Inflationary pressures have continued to ease since we cut interest rates in August. The economy has been evolving broadly as we expected. If that continues, we should be able to reduce rates gradually over time.”

The BoE’s decision contrasts with the more aggressive actions taken by other central banks. In the US, the Federal Reserve cut its interest rates by half a percentage point on Wednesday, marking its first reduction since 2020. The Fed’s new benchmark rate sits between 4.75% and 5%, a move that some analysts viewed as unexpectedly bold in its fight against inflation.

Fed chair Jerome Powell said the super-sized cut was "timely" and "a sign of our commitment not to get behind."

Across the Channel, the European Central Bank (ECB) has also opted for more decisive action, enacting two consecutive rate cuts. Last week, the ECB lowered its main deposit rate from 3.75% to 3.5%, signalling a strong commitment to supporting growth in the eurozone.

Lindsay James, investment strategist at Quilter Investors, said: “Despite the supersized rate cut in the US yesterday and cuts continuing to be enacted in Europe, the Bank of England has decided to hold rates following its first cut in four years last month.

"However, while today may be a pause, the general consensus is to expect more rate cuts this year and into next as the economic momentum that had built up slows and inflation remains close to target. Two more cuts are expected by financial markets, and with time running out in 2024, the next meeting is likely to see the BoE’s next cut delivered."

Read more: What the Bank of England’s interest rate decision means for your mortgage

Interest rates determine borrowing costs for a range of financial products, including mortgages and credit cards, as well as returns on savings. While UK rates were cut for the first time since March 2020 last month, borrowing costs remain high.

Michael Foote, editor-in-chief of the financial comparison site, Quotegoat.com, said: “Every year, millions of Brits turn to borrowing to make Christmas merrier, but with interest rates remaining high, repaying these debts can drag on for much longer. As we approach the festive season, with rising energy bills and escalating holiday costs, meticulous planning becomes crucial. Stick to a rigorous budget for gifts, food, and socialising to sidestep the pitfalls of unnecessary debt."

The decision to keep the base rate unchanged means mortgage repayments are unlikely to shift in the short term, but many homeowners on fixed-rate deals still face the prospect of higher repayments once their arrangements expire in the coming years.

Paul Heywood, chief data and analytics officer at Equifax UK, said: “With house prices also at a two-year high, home buyers, whilst hopeful for another cut, will be grateful for no further rate increases and start to feel the benefit from relief in mortgage rates. Nonetheless, affordability remains a significant challenge for consumers, as average repayments on new lending remain 53% higher than levels observed in January 2022.”

Read more: Funds set to benefit from falling interest rates

The BoE is widely expected to reduce borrowing costs at its next meeting in November, especially as it will have the benefit of assessing the government’s budget, set to be announced on 30 October.

The newly elected Labour government faces the challenge of addressing a £22bn hole in public finances. With potential tax increases and spending cuts on the horizon, such measures could dampen economic growth and apply further downward pressure on inflation.

Interest rate futures are pricing in two more cuts, in November and December, to put the end-year rate at 4.5%.

"Having multiple data points to really assess how fast and how speedy the disinflation narrative is building in the UK, that's something we don't think we will get until the November decision," said Sanjay Raja, chief UK economist at Deutsche Bank.

Analysis by research firm Capital Economics suggests UK rates will hit 4% by the end of 2025.

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