Interest rates ‘set to stay at 5%’
THE Bank of England is poised to keep interest rates at 5% after sending a “clear message” that it would not move too quickly to cut borrowing costs.
Most economists think that ratesetters on the Monetary Policy Committee (MPC) will keep the UK interest rate on hold today.
This would keep the Bank’s base rate – which affects interest rates on borrowing and saving – at the highest level since 2008, during the global financial crisis.
The central bank cut rates from 5.25% in August, implementing the first reduction since 2020 and delivering good news to squeezed borrowers across the country.
Governor Andrew Bailey said it was able to do so because inflationary pressures had “eased enough”, but he stressed that policy makers “need to be careful not to cut interest rates too quickly or by too much”.
Matt Swannell, chief economic adviser at the EY Item Club, said the MPC “sent a clear message that back-to-back rate cuts were unlikely” unless subsequent economic data was weaker than expected.
He said the latest official data, which showed Consumer Prices Index (CPI) inflation remained at 2.2% in August, would not be enough to prompt the Bank to start cutting rates more quickly.
Sanjay Raja, chief UK economist for Deutsche Bank, agreed that the inflation figures “won’t be enough to trigger a surprise rate cut” on Thursday.
“Instead, the MPC will likely take this as a positive sign that underlying price pressures are easing, and could warrant a further dial down of restrictive policy in November, when it conducts its next forecast update,” he said.
UK inflation remained unchanged at 2.2% last month but price pressures picked up pace in the key services sector as air fares jumped higher, according to official figures. The latest data from the Office for National Statistics (ONS) showed Consumer Prices Index (CPI) inflation has remained above the 2% target for the second month in a row, after rising for the first time this year in July.
The ONS said services sector inflation jumped to 5.6% in August from 5.2% in July as air fares rose across European routes, which offset falls in prices at petrol pumps.
Experts said the figures reinforce expectations that the Bank of England will hold rates at 5% when it decides on Thursday.
Grant Fitzner, chief economist at the ONS, said: “Inflation held steady in August as various price fluctuations offset each other.
“The main movements came from air fares, in particular to European destinations, which showed a large monthly rise, following a fall this time last year. This was offset by lower prices at the pump as well as falling costs at restaurants and hotels.
“Also, the prices of shop-bought alcohol fell slightly this month, but rose at the same time last year.”
While CPI is below recent forecasts by the Bank of England, inflation is predicted to edge further above the 2% target towards the end of the year, leaving policymakers in no rush to cut rates, according to economists.
Monica George Michail, at the National Institute of Economic and Social Research (Niesr), said: “Given that inflation is set to gently rise towards the end of the year, and that underlying inflation remains elevated, this reduces chances of a rate cut.”