Bank of England holds rates at 5.25% after inflation falls

MPC in split decision after inflation unexpectedly fell in August

The Bank of England (BoE) has paused its hiking cycle and opted to keep interest rates at the current level of 5.25% after inflation unexpectedly fell in August.

It was a tight split decision by the Bank, with five members of the Monetary Policy Committee voting to maintain the Bank Rate at 5.25%, while four members preferred to increase rates by 25bps to 5.5%.

Investors had widely predicted the 15th rise in a row to 5.5% from 5.25%, but this morning only half of investors expected a rise after it was reported on Wednesday (20 September) that UK inflation unexpectedly fell to 6.7% in August. 

The Federal Reserve also opted to leave its benchmark rate unchanged on Wednesday, while the European Central Bank decided to hike rates by 25bps last week.

In the BoE’s monetary policy summary, it said there are “increasing signs” of some impact of tighter monetary policy on the labour market and on momentum in the real economy more generally. 

“Given the significant increase in Bank Rate since the start of this tightening cycle, the current monetary policy stance is restrictive,” it added. 

The MPC said it would continue to closely monitor indications of persistent inflationary pressures and resilience in the economy as a whole, including the tightness of labour market conditions and the behaviour of wage growth and services price inflation. 

“Monetary policy will need to be sufficiently restrictive for sufficiently long to return inflation to the 2% target sustainably in the medium term, in line with the Committee’s remit,” it added. 

“Further tightening in monetary policy would be required if there were evidence of more persistent inflationary pressures.”

The MPC also voted unanimously to reduce the stock of UK government bond purchases held for monetary policy purposes, and financed by the issuance of central bank reserves, by £100bn over the next twelve months, to a total of £658bn. 

Abrdn Adviser chief commercial and strategy officer Jonny Black said: “Today’s interest rate decision breaks what has been a continuous set of rises since December 2021. However, advisers and clients are far from being out of the danger zone.

“Millions of homeowners are continuing to battle historically high borrowing costs. And while some savers may welcome the higher interest rates of late, advisers should still stress the importance of maintaining a long-term view when it comes to their savings and investment strategies.

“Advisers are critical to helping ensure clients are informed on the big picture and they should not make snap changes to strategy that might not be in their best lasting interests.”

LV= chief investment officer Adam Ruddle added: “The BoE’s decision to hold rates at 5.25% is a surprise – though perhaps less of a surprise given much-improved inflation data. Core inflation which ignores energy and food, fell from 6.9% to 6.2% in August.

“Market expectation was that core inflation would remain at 6.9%. However, given the inflation remains persistently high, I would have expected the Bank to take some action to firmly vanquish the inflation dragon. Inflation is a lagging indicator and a pause at this stage indicates that the bank believes its job to keep prices stable is broadly complete and it turns its focus to the UK’s economic health.

“Our latest research reveals that 20 million UK adults are worried about money as inflation, and the bitter pills to combat inflation, continue to be felt.” 

Valeria Martinez  (Professional Adviser)

Retirement ProfessionalsBank of England holds rates at 5.25% after inflation falls