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The Bank of England has held interest rates at 5.25 per cent after a knife-edge vote that is likely to signal the peak of borrowing costs in this cycle.
Following better than expected inflation data in August, the bank’s Monetary Policy Committee was split five to four in favour of leaving rates unchanged, with BoE governor Andrew Bailey casting the final and decisive vote.
The decision was the first pause after 14 consecutive rate rises since the start of the tightening cycle in December 2021. On Wednesday, the US Federal Reserve also voted to keep its benchmark rate steady.
Although the MPC made little comment about its future actions, it suggested that rates were now high enough to succeed in restoring price stability.
“Monetary policy will need to be sufficiently restrictive for sufficiently long to return inflation to the 2 per cent target sustainably in the medium term,” it said.
Sterling extended losses to trade down 0.66 per cent against the dollar after the decision. Two-year gilt yields, which reflect interest rate expectations, fell to 4.878 per cent, having traded at 4.893 per cent ahead of the vote.
Inflation stood at 6.7 per cent in August and there were no suggestions of a cut in interest rates in the near term.
In a statement, Bailey said: “Inflation has fallen a lot in recent months, and we think it will continue to do so. That’s welcome news. But there is no room for complacency. We need to be sure inflation returns to normal and we will continue to take the decisions necessary to do just that.”
In a letter to the governor, chancellor Jeremy Hunt said the BoE had his “full support” in taking action to get inflation down.
Officials did not think inflationary pressures would strengthen again, but they noted that the hold in rates did not preclude another rate rise in months to come. “Further tightening in monetary policy would be required if there was evidence of more persistent inflationary pressures,” the MPC said.
The five members who voted to hold rates were Bailey, deputy governor Ben Broadbent, chief economist Huw Pill, deputy governor Sir Dave Ramsden and the external member Swati Dhingra.
They highlighted the importance of Wednesday’s inflation figures alongside weaker data across the labour market suggesting previous rate rises were cooling the economy.
“Conditions were likely to warrant a restrictive policy stance being maintained until material progress had been made in returning inflation to the 2 per cent target,” the members said.
The four MPC members in the minority voting to raise rates by 0.25 percentage points to 5.5 per cent disagreed and said there was “still evidence of more persistent inflationary pressures”. Higher borrowing costs would “address the risks of more deeply embedded inflation persistence”, they added.
This hawkish group included three of the four external MPC members — Megan Greene, Jonathan Haskel and Catherine Mann — along with the outgoing deputy governor Sir Jon Cunliffe, who was present for his last MPC meeting.
Alongside the interest rate decision, the committee unanimously agreed to raise the pace of its quantitative tightening process for the year ahead from £80bn in 2022-23 to £100bn in 2023-24.
This reverses more of the money printing undertaken by the BoE since 2009, although the stock of government bonds owned by the central bank was still forecast to stand at £658bn in September 2024.
The MPC said it considered interest rates to be the active tool of monetary policy and the effect of its asset sales on borrowing costs was “modest”.