The Bank of England (BoE) has kept its key interest rate on hold at 4% amid the UK’s inflation remaining marked above target. Despite expectations of a further 25-basis-point cut on borrowing rates, five of the nine members of the Bank’s Monetary Policy Committee voted for unchanged rates while four backed a cut.
Bank Governor Andrew Bailey said the bank still believes rates are on a gradual downward path. He also stressed that the BOE needs to be sure that inflation is falling back to the central bank’s 2% target before another rate cut.
BOE expects inflation to drop early next year
Britain’s annual rate of consumer price inflation is currently standing almost twice the BOE’s 2% target, at 3.8%, which is the main reason rates were kept unchanged. Bailey also expects the current inflation to be the peak.
BoE’s governor also suggested that inflation will drop close to 3% early next year, and then fall towards the Bank’s target. Bailey said that upside risks to inflation have decreased since August, and he expects further policy easing to follow if disinflation becomes more clearly established in the weeks ahead.
The BOE’s interest rate decision comes as Chancellor Rachel Reeves prepares to raise taxes in the Budget on November 26. Reeves emphasized in her speech this week the need to address inflation in order to facilitate lower interest rates. At the time of publication, financial markets have given the chances of a rate cut in December a probability of less than 30%.
However, rate setters will have to digest Reeves’ budget before the Bank’s policymakers can make decisions about a December rate cut. Danni Hewson, head of financial analysis at AJ Bell, argued that Reeve’s surprise press conference on Tuesday was partly a cry for help to the BoE.
The BOE stressed the state of the economy, noting that unemployment was rising gradually to a high peak above 5% early next year amid low hiring demand. The Bank cautioned that speculation over this month’s budget had probably contributed to weakness in the economy in recent months. It also warned that the budget led households to keep a lid on spending amid heightened pressures on living costs.
The Bank of England forecasts a weaker growth rate of 0.2%. The Bank found a drop in exports to the U.S., as well as disruptions to the UK’s manufacturing base linked to the Jaguar-Land Rover cyber-attack, had pulled down output in Q3.
Reeves expects to increase income tax
Reeves hinted at an increase in income tax in the budget, arguing that public finances are in a worse state than expected after years of economic mismanagement. She also said she’s facing the world as it is, noting that economic challenges facing the UK, including global tariffs and sticky inflation, had worsened since last year’s financial statement.
Although Reeves’ tax hike could potentially break Labour’s manifesto on tax, she insists that she has to do the right thing even if it proves unpopular. The Chancellor stated that the budget would focus on the priorities of British citizens, including the NHS and reducing the cost of living and national debt.
Reeves said that even though there will be a lot of speculation about the choices she makes, she believes the choices are important and will shape Britain’s economy for years to come. The Chancellor also speculates that the government will again attempt welfare reform after Labour MPs blocked plans to overhaul the system earlier this year.
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Source: https://www.cryptopolitan.com/boe-keeps-key-interest-rate-unchanged/
