The Bank of England has refused to cut interest rates from a 16-year high – despite inflation finally falling to reach its 2 percent target.
Homeowners struggling with rising mortgages will be forced to wait at least another two months before borrowing costs fall, after the Bank’s nine-member Monetary Policy Committee decided on Thursday to keep the base interest rate at 5.25 percent for the seventh month in a row.
Bank of England Governor Andrew Bailey had opened the door to a rate cut early last month, saying he was “optimistic that things are going in the right direction” and that a June rate cut was an option – although by no means a certainty .
But despite data on Wednesday showing headline inflation fell from a recent 40-year high of 11 percent, meeting the bank’s target for the first time since July 2021 – reaching the target faster than the United States or the Eurozone – the medium-term picture is now less reassuring.
Service price inflation has fallen less than the Bank had expected at the last meeting – falling only to 5.7 percent from 5.3 percent – and private sector wage growth is almost twice as high as The Bank judges that this is compatible with an inflation rate of 2 percent.
Interest rates will remain at 5.25 percent at least until the next meeting of the Monetary Policy Committee in August. Seven members of the committee voted against a 0.25 percent cut on Thursday, while two – Dave Ramsden and Swati Dhingra – voted in favor.
The Bank’s governor, Andrew Bailey, said policymakers “need to be confident that inflation will remain low and that is why we have decided to keep interest rates at 5.25 percent for the time being.”
However, financial markets have also lowered expectations for an interest rate cut in August. On Wednesday they had only priced in a 30 percent chance, with a first move more likely in September and the risk of a delay until November, similar to expectations for the US Federal Reserve.
Homeowners have been hit hard by the sudden increase in interest rates. Around 1.6 million mortgage holders will reach the end of their fixed interest rates this year, facing an average increase in their repayments of around £1,800 a year, the Resolution Foundation previously estimated.
The latest figures from the Bank of England show that the value of outstanding mortgage balances in arrears has risen by 50 per cent since 2022, bringing the total to more than £21 billion.
And analysts at investment firm Hargreaves Lansdown calculated last month that the mortgage repayments of 2.1 million homeowners – one in four – will exceed 25 percent of their disposable income by the end of this year, putting them at risk of payment arrears.
But the Monetary Policy Committee warned on Thursday that it “will have to remain restrictive long enough to sustainably return inflation to the 2 percent target over the medium term,” warning of the risk that inflation – which is set to rise again later this year years – above 2 percent could be ’embedded’.
The committee will “continue to closely monitor indications of persistent inflationary pressures and resilience in the broader economy, including a range of measures of underlying labor market tightness, wage growth and service price inflation,” the committee said.
The pound fell against the US dollar and the euro following the Bank’s decision not to cut interest rates, falling 0.2 and 0.1 percent respectively.
Martin McTague, chairman of the Federation of Small Businesses, said the decision was widely predicted but was “no less disappointing”, warning that “the high interest rates currently locked in are now undermining growth as small businesses struggle to access affordable financing to help them expand” .
And Unite union chief Sharon Graham said: “Once again the Bank of England has failed to act in the interests of workers and struggling families. Major economies around the world have cut interest rates and Britain must follow suit.
“High interest rates increase the profits of city bankers, but hit the pockets of all of us who have to pay mortgages and rents. It’s time for the bank to get a grip.”