Bank of England split over interest rate decision

Bank of England split over interest rate decision
Bank of England

The Bank of England has held interest rates at 5.25% in a decision that saw its rate-setting body split three ways.

The Bank admitted it had discussed cutting borrowing costs, with inflation – which measures the pace of price rises – set to fall quickly this year.

Bank chief Andrew Bailey said it would wait for firm evidence that inflation was under control before it cuts rates.

But for the first time since the 2020 Covid pandemic, one Bank policy maker voted for an immediate cut.

However, while Swati Dhingra voted to cut rates to 5%, two members of the monetary policy committee (MPC) backed an increase to 5.5%.

It is the first time there has been a three-way split on whether rates should rise or fall since the 2008 financial crisis.

Inflation has fallen sharply since a 40-year peak in October 2022 to 4% last month.

The Bank is charged with keeping price growth at, or close to, a target of 2%.

It said in its latest inflation report that the figure would fall back to that target between April and June this year – quicker than it had previously expected.

“We have had good news on inflation over the past few months,” Mr Bailey said.

But while the Bank is now suggesting that rates have peaked, the governor signalled that any cut may still be some months away.

“We need to see more evidence that inflation is set to fall all the way to the 2% target, and stay there, before we can lower interest rates,” he said.

Line chart showing UK interest rates

There is concern among some rate-setters that the fall in the inflation rate towards the Bank’s target is “artificial”, due to the cut to the energy price cap, and that inflation will rebound somewhat over the summer as global energy prices have picked up.

In addition, growth in pay remains strong, with the Bank’s survey of hundreds of companies pointing to a 5.4% rise in wage settlements this year.

Dr Dhingra, the economist who voted for a cut, pointed to risks from geopolitics, and the fact it takes a long time for rate decisions to affect the economy.

The Bank’s new forecasts show that keeping rates at their current level could push a barely growing economy into an outright recession.

Source: bbc.co.uk

By David Ryckman