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Bank of England| AccountingWEB | Bank of England dashes hopes of rate cut
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Bank of England dashes hopes of interest rates cut

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The Bank of England has held interest rates at the 15-year high of 5.25%, disappointing those hoping for an early Christmas present of a rate cut. 

14th Dec 2023
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The central bank today announced that interest rates will remain unchanged at 5.25%. 

The monetary policy committee (MPC) voted by a majority of 6–3 to maintain the bank rate, with three members preferring to increase the bank rate by 0.25 percentage points, to 5.5%.

The six members who voted to maintain the bank rate at 5.25% argued that it was too early to conclude that services price inflation and pay growth were on a firmly downward path. 

"Both of these metrics of inflation persistence remained higher than in other major advanced economies, possibly reflecting less favourable supply-side developments and stronger second-round effects in the United Kingdom. Second-round effects were likely to be slow to unwind and, with the labour market still tight, the extent to which wage and price-setting would take account of the downward path of CPI inflation was not clear," said the report.

Those voting to maintain the base rate noted that risks to CPI inflation in the medium term remained "skewed to the upside including from events in the Middle East".

Meanwhile, the three members who preferred an increase to 5.5% put forward that there was "evidence of more persistent inflationary pressures". This included the fact that wage growth although moderated remained at rates above those consistent with the inflation target of 2% and underlying service price inflation had remained elevated. They concluded: "An increase in Bank Rate at this meeting was necessary to address the risks of more deeply embedded inflation persistence and to return inflation to target sustainably in the medium term."

Reponding to the rate decision, a Treasury spokesperson said: “We have turned a corner in our fight against inflation and real wages are rising, but we must keep driving inflation out of the economy to reach our 2% target."

“By cutting taxes for hard-working people and businesses, and helping people into work, we are forecast to deliver the largest boost to potential GDP on record.” 

'Far too early'

Since the last interest rate announcement in November, inflation has fallen from 6.7% to 4.6%. However, the MPC decided against reversing their current steady-as-it-goes policy and cutting the base rate. 

But while the headline inflation and wage increases are gradually falling, the central bank is steadfastly cautious with interest rates. Andrew Bailey, the governor of the Bank of England, has repeatedly said that it was “far too early” to think about rate cuts, reminding those pushing for cuts about the central bank’s target to get inflation down to 2%. 

“That's why I have pushed back of late against assumptions that we're talking about cutting interest rates,” he recently said.

The Bank of England’s decision to hold interest rates mirrors that of the US Federal Reserve and the EPC tactics in recent months. 

The Bank of England said that CPI inflation is expected to remain near its current rate around the turn of the year. The MPC noted that it will "closely monitor" indications of persistent inflationary pressures, including tightness of labour market conditions, wage growth and services price inflation. With the central bank focused on meeting the 2% target, it outlined that the monetary policy "would need to be sufficiently restrictive". It added: "The committee continued to judge that monetary policy was likely to need to be restrictive for an extended period of time. Further tightening in monetary policy would be required if there were evidence of more persistent inflationary pressures."

Dovish approach

The MPC’s dovish approach to interest rates was also recently echoed by the BoE’s Finance Policy Committee’s (FPC) December summary, where it said that the overall risk environment “remains challenging” and said the “subdued” economic activity “further risks to the outlook for global growth and inflation”. 

The FPC, however, noted that the long-term interest rates in the UK are around pre-2008 levels and the full effect of that has yet to come through. This poses “ongoing challenges to households, businesses and governments, which could be amplified by vulnerabilities in the system of market-based finance”, the summary said. 

This is the third consecutive time the Bank of England has held interest rates, coming after 14 consecutive base rate hikes since December 2021. When the Bank of England started its campaign to control spiralling inflation at the end of 2021, the base rate was 0.1. It then crept up to 0.25 on 16 December and then incrementally increased from there. 

The economy has seen some positive signs over the past few months, as inflation has started to fall, although the Bank of England has admitted that it's still far off from meeting its 2% target by the end of 2025. 

The drop in inflation, however, provided the Chancellor with the economic headroom at the Autumn Statement to announce a cut in national insurance and permanently extend the full expensing capital allowance scheme. 

At the last interest rate announcement in November, Richard Murphy told AccountingWEB that the Bank of England had “wildly over-reacted” to inflation and interest rates were “much too high”. 

Recently, Helen Thornley wrote on AccountingWEB about the effect rising interest rates are having on the amount of tax savers are having to pay. The article reported that 2.7 million people will have to pay tax on savings income in 2023/24, up one million compared to the previous year. Thornley highlighted concerns about how this will affect unrepresented individuals who are not aware that they have a tax liability.

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Should Be Working ... not playing with the car
By should_be_working
14th Dec 2023 12:04

"..disappointing savers and businesses hoping for an early Christmas present of a rate cut."

I suspect savers are quite happy that rates haven't been cut.

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Replying to should_be_working:
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By FD-HBC
14th Dec 2023 12:06

I was thinking the same. Why would a saver relish an interest rate cut ? Doesn't make sense to me.

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Replying to FD-HBC:
Richard Hattersley
By Richard Hattersley
14th Dec 2023 12:16

Thanks for your comment. Apologies for the oversight. The article has been updated.

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Replying to should_be_working:
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By Justin Bryant
14th Dec 2023 12:25

And cheering anyone about to go on holiday also.

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By johnjenkins
14th Dec 2023 12:08

Mortgage interest rates coming down yet base rate stays the same. Enlighten me, someone please.

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Replying to johnjenkins:
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By Ian McTernan CTA
14th Dec 2023 12:12

Mortgage rates are more closely tied to gilt yields rather than purely on bank base rate...

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Replying to Ian McTernan CTA:
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By johnjenkins
14th Dec 2023 12:31

Or perhaps lenders aren't getting much business.

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Replying to Ian McTernan CTA:
By Ruddles
14th Dec 2023 20:53

Not only that, but also on what they guess will happen to base rate in the short to medium term. When one says that mortgage rates are coming down I assume that is a reference to new fixed rate deals. My existing variable rate is certainly not decreasing.

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By philaccountant
14th Dec 2023 12:09

As if life in BrokenBrexitBritain couldn't be any more incoherent, we have the BoE pursuing a deliberate policy of inflicting a recession on the rest of us whilst the brain boxes in our media (mostly Oxbridge trained) stand around with a magnifying glass analysing what it could be that's causing this economic damage.

Thank god they're being seen to get inflation under control though, despite it mostly being externally caused and having little to do with monetary their policy.

So yes, a free recession for you all so the government can chase a few headlines and Mr Bailey can keep his very well paid job.

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By listerramjet
14th Dec 2023 12:11

It is the Bank of England’s monetary policy committee who pronounce on the Bank Base Rate. A central bank is a more generic term designed for use by populist newspapers!

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By Self-Employed and Happy
14th Dec 2023 12:12

I only expect it to come down by 0.75% next year anyway, then we have an election which in itself will bring uncertainty as there may well be a new government this time round.

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Replying to Self-Employed and Happy:
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By johnjenkins
14th Dec 2023 12:34

Unless Tory voters go over to reform. Now that would make an interesting Government.

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By Ian McTernan CTA
14th Dec 2023 12:16

Can we please stop with the clickbait type headlines?
'Bank dashes hopes of interest rate cut' is the sort of headline I'd expect in the Sun.

How about: Bank holds interest rate at 5.25%.

And savers having to pay more tax isn't a bad thing: it means they earned more money (of which they keep a majority).

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Replying to Ian McTernan CTA:
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By Justin Bryant
14th Dec 2023 14:26

Yes, not even the Sun is so dumb as to contend that savers having to continue to pay more tax (due to interest rates not decreasing) is a bad thing for them. That's just nuts. It's like saying wining the lottery is bad news as you have to suffer the jealously of others.

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By cfield
14th Dec 2023 12:18

Probably just auto-pilot. Savers have been disappointed for so many years now that it must still be almost habitual to think that whenever an interest rates announcement is made.

Good point about the tax though. Gone are the days when clients would say their bank interest was just pennies and we could just accept it. A bit of healthy professional scepticism is the order of the day now if you hear that. Get them to check their online statements, assuming they can remember their logins.

Remember, even if covered by the personal savings allowance, bank interest could have an impact on Child Benefit or dividend tax, as it still sits within the tax bands.

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By soundadvice
14th Dec 2023 14:58

Sadly we have a clueless Governor of the BofE and a fiddling Chancellor lacking any vision at all for the future and scribbling idiots in the City who panic as soon as anyone dares to come up with anything different.
Growth needs incentives; incentives for Companies and incentives for people to work. What we don’t need is the plethora of incentives to “not work”.
Over a 5 year period.
We need Corporation Tax to be reduced to 15% or better still 12.5% as in Ireland (where tax proceeds are flooding in as a result of companies pouring in to the country) and all the ludicrously complicated reliefs and allowance put on a bonfire. The recent increase to 25% will almost certainly see revenues fall.
For individuals 2 things. Make sure everyone above the age of 18 who is working gets paid the national living wage. Then increase the annual tax free allowance over time to 18,500 which is a full working year x the national living wage.
Paid for partly by halving “in work” benefits.
In this way people will have incentives to work rather than incentives to not work.
It isn’t rocket science!!

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Replying to soundadvice:
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By johnjenkins
14th Dec 2023 15:13

I'll go one better. The ATF should be linked to NLW. Now, and also let's get rid of this stupid 40% tax bracket. Then you can start looking at a flat rate of tax for all whilst abolishing NI. At least then all working people on a full week wouldn't have to claim benefits.

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By soundadvice
14th Dec 2023 17:09

I wouldn’t disagree with that .. a flat rate of income tax of 30% and no NI sounds like a good plan. More controversially I would apply that to passive income as well including receipts of gifts .. so a gift tax to replace inheritance tax; I know people will squeal and say income that has already been taxed should not be taxed again but my view is that the recipient would still be getting 70% of a gift for doing nothing.

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Replying to soundadvice:
By cfield
14th Dec 2023 17:54

soundadvice wrote:

I know people will squeal and say income that has already been taxed should not be taxed again but my view is that the recipient would still be getting 70% of a gift for doing nothing.

Does that bother you then? People getting a gift for nothing? Why not tax them on their Christmas presents too?

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By soundadvice
14th Dec 2023 20:36

Yes quite comfortable with the concept of certain gifts being taxed. All taxes are painful but taxes have to be raised one way or another. I would happily try to reduce taxes on hard earned income if I could and if that meant raising taxes on gifts then I have no problem with that. If someone say received a gift of 10,000 less tax of 3,000 they have still received a gift of 7,000 at the end of the day for not actually doing anything. Certainly think inheritance tax needs to be reformed because too many people, particularly wealthier people, manage to plan things so that they pay no inheritance tax at all.

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Replying to soundadvice:
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By johnjenkins
15th Dec 2023 08:49

If the concept of a tax or law is wrong it will get circumvented.
IR35 is a classic. IHT and CGT shouldn't even be on the statute books.
So now you will say "how will we raise the money to pay for HS2, Rwanda, MTD etc? " The answer is we don't cos we don't need them. Let's get back to putting money where it's really needed. What do you do with the boat people? Send them back to France. Nigel come on mate, the Tory party are ripe for takeover.

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Replying to johnjenkins:
By cfield
15th Dec 2023 11:15

johnjenkins wrote:

What do you do with the boat people? Send them back to France. Nigel come on mate, the Tory party are ripe for takeover.


There's only one slight problem. The French won't have them back. We don't have to put them on barges or pay for expensive hotels though. Did anyone see the TV series Ten Pound Poms a few months ago? All we need to do is build them camps like that, minus the rats and cockroaches of course, and minus the exit doors. We should not be letting them wander around, disappearing. They should stay there until their identities have been proved and their appeals heard. No need for deals with Rwanda. Why don't we just send them to the Isles of Scilly? Or St Helena maybe. There is a legal precedent for that. Some other bloke who came over from France, I forget his name.
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Replying to cfield:
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By johnjenkins
15th Dec 2023 11:29

I don't think the French would have any choice. It's a safe country and ECHR says its ok to send them to a safe country.

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Replying to johnjenkins:
By cfield
15th Dec 2023 11:46

Of course they have a choice. It's not just the ECHR that has a say. The safe country has got to be willing to accept them. The migrants will need passports just to get through Customs, but most of them went in the Channel. So what are they going to do? Go back in rubber dinghies again? They might well do that of their own accord the way this country is going, along with many more of us.

If we think things are bad now, just wait until climate change has turned arable land in the tropics into desert. In 20-30 years time, it won't be thousands. It will be millions or tens of millions, and they will be real refugees, not economic migrants. What the hell are we going to do then?

The only solution I think is to build cities like Las Vegas or Dubai that are designed to survive in the desert. We will need to spend billions on water salination plants and use them to irrigate the surrounding land. Those cities would prosper and generate enough money to pay for themselves, with huge returns for investors brave enough to put the money in. It might even cause a refugee problem the other way, with us flooding over to join them.

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Replying to cfield:
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By johnjenkins
15th Dec 2023 11:52

Hold on there pardner, France has already accepted them cos that's where they came to the UK from, or are you saying that the French sent them to the UK.

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Replying to johnjenkins:
By cfield
15th Dec 2023 12:56

But did France accept them or did they just sneak into France from Italy without permission? They sent themselves to the UK. Yes, the French should have done more to stop them, but that doesn't mean they have to take them back again. Barking up the wrong tree there I fear.

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Replying to cfield:
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By johnjenkins
18th Dec 2023 10:25

France accepted them by default. Let's go one further the EU accepted them when they landed in EU territory. What did they say? ah yes We will take a million (I know it was Germany but they are part of the EU). Once they landed in Lala land then they become the EU's responsibility. Not rocket science. It's just that we haven't got the Government willing to upset the applecart and the next lot are going to be just as wishy washy.

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Replying to johnjenkins:
By cfield
18th Dec 2023 10:48

Well I don't think that would cut much ice if we chugged into Calais harbour with a ferryful of them, nor a court of law for that matter.

Your last sentence is 100% correct though, except that the next lot are going to be a lot worse than wishy-washy, on this matter and much else. Time for voters to woke up.

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Replying to cfield:
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By johnjenkins
18th Dec 2023 12:43

OK let's think this through. The message would get through to the awaiting illegals that they get shipped back straight away. So we have "stopped the boats". Now the legalities could take years in the courts but we have already completed the mission. S we have to pay a measly fine to the EU. Much cheaper than keeping them in hotels et al.
My point is not how, where or what, it's doing something positive that will get the message through that we won't take illegals. Or is the Government saying "yes we will take illegals". Seems that way.

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Replying to johnjenkins:
By cfield
18th Dec 2023 15:16

Yes but they won't get shipped back straight away, will they? That's the problem. The French would simply stop the ferries from docking and the channel hoppers from disembarking.

I still think my Scilly Isles idea is a good solution. 1) It's part of England so no need to deport them. 2) The Atlantic Ocean is a major deterrent to jumping back in a rubber dinghy and heading for Cornwall. 3) There won't be any rubber dinghies anyway as the gangs won't be able to get there, and if they try, the Navy will intercept them. 4) It's sparsely populated, just 2,100 at the last Census, so not too much opposition from local residents and 5) there is plenty of heathland to build Ten Pound Pom style camps on.

In terms of numbers, the Scillies are 6.3 square miles. The population density is roughly 360 per square mile which is about 0.9 people on a football pitch. By comparison, the population density of Greater London is 14,550 per square mile, so 14,550 / 360 means we could increase the population x roughly 40. That gives us 2,100 x 40 = 84,000 which is still only 36 people per football pitch, so not too crowded. They'd have to live on fish though as not too much else to eat.

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Replying to cfield:
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By johnjenkins
18th Dec 2023 16:07

Of course they get shipped back straight away. The boat that rescues them takes them straight back to the beach they came from. They will soon run out of money to buy dinghies. Now an entrepreneur could make a few bob selling the dinghies they came over with to the organisers in France. Bit like the Irish pig VAT border crossing scam many years ago.
Better still, off the boat, onto a coach, to the airport and away to wherever.
Scilly Isles? why not Chanel Isles?

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Replying to soundadvice:
By cfield
15th Dec 2023 11:29

Well if I was going to give someone £10,000 and the taxman said £3,000 must go to him, I wouldn't bother. I'd just give it to charity instead. I take it you don't want to tax charity donations too. If so, I'd just hand it over in cash to whoever I liked, or are we going to ban cash too? No matter, people will carry on using it anyway in their own private economies. Change it for dollars or euros if necessary.

That sums up the whole problem with excessive tax. All it does is kill economic activity, so there is no tax revenue at all. We'll see that soon with the new 25% corporation tax rate. I bet tax receipts go down, not up. Companies will just set up in Ireland instead.

Most of us are tax-planners. We advise clients with companies to stick to £50k or £100k. Why do we do that? To avoid what have come to be seen as unfair taxes. If the rates went down or the thresholds went up, there would be an immediate boost to tax revenues. Why can't Chancellors see that?

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Replying to cfield:
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By soundadvice
15th Dec 2023 17:24

Totally agree with your assessment of the Corporation Tax situation; the 25% rate will not lead to increased revenues; as I mentioned earlier in Ireland CT revenues have gone through the roof at 12.5%.

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By Mallock
15th Dec 2023 09:23

I am really not impressed by the Bank of England's take on all of this. They state they are keeping interest rates where they are because wage increases are too high whilst missing the fact that wage demands are high and getting higher because people can't afford their mortgages or the other externally inflicted inflationary pressures.

The bank need to be ahead of the curve in their decisions otherwise they won't influence the actions of the general public or businesses. Lower interest rates or the news that they will come down soon, will lead to lower wage demands. It doesn't work the other way round.

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