UK interest rates stay at 5.25% in surprise move by Bank of England

The Bank of England announcement comes after inflation unexpectedly fell this week

Joe Middleton
Thursday 21 September 2023 20:09 BST
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UK Inflation Falls to 6.7% in August, Below Expectations

There is light at the end of the tunnel for cash-strapped mortgage holders after the Bank of England (BoE) kept interest rates on hold at 5.25 per cent for the first time in almost two years.

In a close decision, the BoE’s monetary policy committee decided to keep the base rate, rather than raise it to 5.5 per cent, which some economists and investors were expecting.

It is the first time since November 2021 that the BoE has left rates stable after 14 consecutive increases, as it attempted to put a lid on runaway inflation. Officials still left the door open to further rises in the future, promising to “take the decisions necessary” to return inflation to a level of 2 per cent.

However, in a sign struggling homeowners could soon find some relief, economists and mortgage brokers predicted that any further increase in rates is “diminishing fast” and predicted they “are already at their peak”.

Andrew Bailey, governor of the Bank of England, said: “Inflation has fallen a lot in recent months and we think it will continue to do so. That’s welcome news. But there is no room for complacency.

“We need to be sure inflation returns to normal and we will continue to take the decisions necessary to do just that.”

BoE policymakers downgraded its forecast for the UK’s economy and it now expects gross domestic product (GDP) to rise just 0.1 per cent in the third quarter of this year. This is compared with the 0.4 per cent rise it forecast in August.

A drop in inflation on Wednesday from 6.7 per cent in August, down from, 6.8 per cent in July, appears to have convinced the BoE to keep the rate the same.

The Bank of England’s governor Andrew Bailey said there is ‘no room for complacency’

The figure came as a surprise to economists and policymakers at the BoE, with money markets then split on whether the rates would go up or stay the same. Earlier in the month, Mr Bailey said that recent rises in fuel prices probably meant that inflation would “tick up” in August.

Economists have broadly welcomed the pause in interest rates, with some saying they think this will be the peak of borrowing costs.

Dr George Dibb, head of IPPR’s Centre for Economic Justice, said the pause in interest rates was “welcome” but that the rates are already “too high and starting to bite”.

“The UK economy shrank in July, the Bank has downgraded its growth forecast for this quarter, and the labour market has clearly started to turn downward. The Bank is worried about rising pay which is being driven by the financial sector. Yet, it’s another group of people who are likely to pay the price of a recession – those in insecure employment or struggling with housing costs.

“Meanwhile, sharply rising rents and the risk of another energy price spike this winter highlight the need for the government to do more to keep inflation in check, and not just rely on the Bank of England.”

Chief UK economist at Capital Economics, Paul Dales, told The Telegraph: “The surprise decision by the Bank of England to leave interest rates unchanged at 5.25 per cent today probably means that rates are already at their peak.

“We think rates will stay at this peak of 5.25 per cent for longer than the [Federal Reserve], the ECB and investors expect, but that when rates are cut in late 2024 they will be reduced further and faster than widely expected.”

And Suren Thiru, economics director at ICAEW, added: “With growing evidence that inflation is on a strong downward trajectory amid a flagging economy, the case for further interest rate hikes is diminishing fast.”

Andrew Montlake, managing director of the UK-wide mortgage broker, Coreco, said: “Common sense has finally prevailed and this pause for breath to buy time to analyse further data will be welcomed by many. There really is no point in heaping further misery on mortgage borrowers who have been hammered enough already.

“We have already seen that inflation, and most importantly core inflation, have started to recede as previous rate rises continue to filter through the system and this is expected to continue.” It now looks like we are at the very top of the interest rate cycle, with SWAP rates continuing to ease and giving lenders more space to engage in a rate war as they battle for market share and look to get a good start to 2024.

“As this competition increases, we will see more products available starting with a 4 per cent rather than a 5 per cent and this will inevitably start to encourage more buyers back into the market as they seek to take advantage of the buyers’ market whilst it lasts.”

Meanwhile, consumer champion Martin Lewis, warned that savers may see some rates being shaved down after the pause in rate rises.

In a post on X, formerly Twitter, he suggested considering locking into a top fixed-rate account, but not funding until you are able to see what happens with the rates.

Chancellor Jeremy Hunt said: “We are starting to see the tide turn against high inflation, but we will continue to do what we can to help households struggling with mortgage payments.

“Now is the time to see the job through. We are on track to halve inflation this year and sticking to our plan is the only way to bring interest and mortgage rates down.”

Shadow chancellor Rachel Reeves said inflation still remains high and those on fixed-rate mortgages are still paying on average, more than £220 a month.

“Britain has been left worse off after 13 years of economic chaos and instability under the Conservatives,” she said.

“Households coming off fixed-rate mortgages will be paying an average of £220 more a month and inflation remains high because of the Conservatives’ disastrous mini-budget.

“Labour’s plan for the economy is about returning stability and boosting growth so we can cut household bills, create better-paid jobs and make working people in all parts of the country better off.”

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