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Bank of England holds steady on interest rates

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The Bank of England has decided to leave interest rates at the current 15-year high of 5.25% as the 2% inflation target still remains out of the central bank's grasp.

1st Feb 2024
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The central bank confirmed today that interest rates will remain unchanged for the fourth consecutive time. 

The monetary policy committee (MPC) voted by a majority of 6 - 3 to maintain the bank rate at 5.25%, with the other two members favouring an increase to 5.5% and one member preferring to reduce the bank rate by 0.25 percentage points to 5%. 

Those that voted against changing the current policy maintained that although service price inflation and wage growth have fallen more than expected, inflation persistence remained elevated and they had questions about how entrenched this persistence would be. Meanwhile, the two members wanting to increase the rate argued that it was "necessary to address the risks of more deeply embedded inflation persistence", reasoning that the labour market was still relatively tight and wage growth remained at rates above those consistent with the inflation target.

The sole member voting to cut interest rates contended that the bank rate needed to become less restrictive now. "Waiting for lagging indicators of domestic relative price growth to fall sharply before reducing rates would come with a risk of overtightening, explaining that it’s too early to cut interest rates as they’re still in the throes of suppressing inflation," said the report.

Inflationary pressures

The Bank of England’s dovish stance to interest rates comes after inflation climbed back up to 4% in December from 3.9% in November. Despite inflation dropping considerably since the high of 11.1% in October 2022, the current rate is below expectations in November. 

"This downside news has been broad-based, reflecting lower fuel, core goods and services price inflation. Although still elevated, wage growth has eased across a number of measures and is projected to decline further in coming quarters," said the central bank in February's monetary policy summary

The Bank expects inflation to be around 2.75% by the end of this year and then remain above the 2% target over the remainder of the forecasr period. "This reflects the persistence of domestic inflationary pressures, despite an increasing degree of slack in the economy. CPI inflation is projected to be 2.3% in two years’ time and 1.9% in three years," said the report, with the MPC expecting to see risks from domestic price and wage pressures.

After today's announcement, pressure is on the central bank to cut interest rates. However, the cut in interest rates are not likely to come by the next Bank of England announcement on 21 March, but investors are expecting a change in approach by June. However, the monetary report said that as a result of inflation persistance, the "monetary policy will need to remain restrictive for sufficiently long to return inflation to the 2% target sustainably in the medium term".

Adding, "The Committee has judged since last autumn that monetary policy needs to be restrictive for an extended period of time until the risk of inflation becoming embedded above the 2% target dissipates." 

The MPC is poised, though, to adjust the direction of their restrictive approach depending on the underlying tightness of labour market conditions, wage growth and services price inflation and will keep under review how long the bank rate is maintained at the cuurent level.

'Economic sadism'

The Bank of England’s restrictive handling of interest rates have come under criticism. Richard Murphy, a chartered accountant and one of the Bank of England’s fiercest critics, branded the central bank’s approach as “economic sadism”. 

Calling for the Bank of England to be stripped of its independence, Murphy wrote on his blog today that there is “not the slightest shred of evidence” to support the current high interest rates.

“Pursuing this goal, they reveal their own agenda and their own lack of understanding of economics, including how wage movements lag those in prices,” said Murphy.  

“But never doubt that if a person is given power and a single tool to exercise it they will use that tool if they can, which is exactly what the Bank is doing.”

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Replies (3)

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By johnjenkins
02nd Feb 2024 11:41

I don't normally agree with Richard Murphy but his analysis of the banks motivation is spot on.

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By Justin Bryant
02nd Feb 2024 17:22

So, we should ignore the fact all other central banks are raising rates to fight inflation should we? I wonder what would happen to £GBP then?

Also, RM doesn't understand that interest rates are determined mainly by the bond market, not central banks. That's why everyone is afraid of the bond market, as someone famously said.

https://policyexchange.org.uk/blogs/beware-the-bond-markets/

In short, people's mortgages and bank loans are determined by 10 year gilt yields (and not BoE base rate) and in September 2022 we saw what happened to those didn't we when an economically incompetent fool is in charge of things (namely Trussonomics)?

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By johnjenkins
05th Feb 2024 09:20

There is no reason why interest rates should be linked to anything. Unfortunately the investment world is so tied up in rich peoples whims it will always go up and down accordingly.
Also there should be no link to house prices. It is ludicrous to have a house valued at £500k one minute and £400k or £600k the next. It is high time, the stuff we depend on to live was brought under better control.

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