Bank of England holds key rate as it warns of ‘heightened uncertainty’ – National

The UK’s central bank warned of “heightened uncertainty” on Thursday as it stayed interest rates stop after inflation moved beyond target, even at a time when the British economy is flatlining at best.

The Bank of England’s nine-member Monetary Policy Committee kept its key interest rate unchanged at 4.75% with new data showing inflation rising to 2.6%, further above the bank’s target of 2%.

In response, the rate-setting panel, which last cut its key rates in November, is taking a cautious stance as lower borrowing costs could potentially fuel inflation even further.

The decision was widely expected in financial markets, but surprisingly, as many as three of the members voted for a quarter point cut. This may indicate a further reduction at the next policy meeting in February if there are no major inflationary surprises.

“We must make sure that we meet the 2% inflation target on an ongoing basis,” said Bank Gov. Andrew Bailey, who voted to keep rates on hold. “We think that a gradual approach to future rate cuts remains good, but with the increased uncertainty in the economy, we ​​cannot commit to when or how much we will reduce rates in the coming year.”

Struggling sectors of the UK economy and homeowners are hoping more cuts next year would provide some relief. The British economy has now contracted for two months in a row.

“The bank’s decision to hold interest rates, while expected, will still come as a tangible blow to households struggling with difficult mortgage bills and businesses facing a jump in costs after the autumn budget,” said Suren Thiru, economics director at the Institute of Chartered Accountants in England and Wales.

The bank’s decision comes a day after the US Federal Reserve cut interest rates, but Chairman Jerome Powell signaled the Fed would slow the pace of rate cuts going forward after inflation forecasts were revised higher.

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The minutes for the decision of the Bank of England show that rate-setters warned about the economic outlook in the throat of the first budget of the new Labor government and the outcome of the US presidential election.

Critics argue that the budget in October has both increased inflationary pressures, while also dampening growth. A large increase in corporate taxes may encourage businesses to offset higher costs by raising prices or cutting back on hiring. The government claims it needed to raise taxes to shore up public finances and inject money into cash-starved public services.

And with Donald Trump returning to the White House in January, there is uncertainty over whether the incoming US administration will impose tariffs on imports, an economic strategy that could lead to a tit-for-tat response that stimulates inflation and reduces growth.

Yet inflation in the UK and around the world is much lower than a few years ago, in part because central banks dramatically raised borrowing costs from near zero during the coronavirus pandemic when prices began to shoot up, first as as a result of supply chain problems and then because of Russia’s full-scale invasion of Ukraine which drove up energy costs.

As inflation rates have fallen from multi-decade highs, central banks have begun to cut interest rates, although few, if any, economists think rates will fall back to the super-low levels that persisted in the years following the global financial crisis. financial crisis of 2008-2009.

& copy 2024 The Canadian Press