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The Bank of England warned on Thursday of “increased uncertainty” as it continued interest rates pending after inflation it has moved further off target, even at a time when the UK economy is flat at best.
The Bank of England’s nine-member Monetary Policy Committee kept its main interest rate unchanged at 4.75%, with new data showing inflation rose to 2.6%, above the bank’s 2% target.
In response, the interest rate-setting council, which last cut its key rate in November, is taking a cautious stance as lower borrowing costs could potentially boost inflation further.
The decision was widely anticipated in the financial markets, but surprisingly, as many as three members voted in favor of a quarter-point reduction. This could signal further tapering at the next policy meeting in February if there are no major inflation surprises.
“We need to be sure that we achieve the 2% inflation target on a sustainable basis,” said Bank Governor Andrew Bailey, who voted to keep rates on hold. “We think a gradual approach to future rate cuts remains appropriate, but with increased uncertainty in the economy, we cannot commit to when or by how much we will cut rates in the coming year.”
Struggling sectors of the UK economy and homeowners are hoping for bigger cuts next year to bring some relief. The UK economy has now contracted for two consecutive months.
“The Bank’s decision to keep interest rates on hold, while expected, will still come as a tangible blow to households struggling with burdensome mortgage bills and businesses facing a spike in costs after the Autumn Budget,” said Suren Thiru, director of economics at the Institute. . of Chartered Accountants in England and Wales.
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The bank’s decision comes a day after the US central bank cut interest rates, but Chairman Jerome Powell signaled the Fed would slow the pace of future rate cuts after inflation forecasts were revised higher.
Minutes of the Bank of England’s decision show that rate-setters were warning about the economic outlook after the new Labor government’s first budget and the outcome of the US presidential election.
Critics argue that the October budget simultaneously increased inflationary pressures and slowed growth at the same time. A large increase in business taxes could encourage companies to offset higher costs by raising prices or cutting employment. The government claims it had to raise taxes to bolster public finances and inject money into cash-strapped public services.
And with Donald Trump back in the White House in January, it is uncertain whether the new US administration will impose tariffs on imports, an economic strategy that could lead to a backlash that fuels inflation and reduces growth.
Yet inflation in the UK and globally is far lower than it was a few years ago, partly because central banks dramatically increased borrowing costs from near zero during the coronavirus pandemic when prices began to rise, first as a result of supply chain problems, and then due to the full-scale Russian 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 return to the super-low levels that existed in the years following the global financial crisis of 2008 and 2009. year.
© 2024 The Canadian Press
