Bank of England holds main interest rate at 16-year high of 5.25%, despite inflation drop

On Thursday, the Bank of England decided to maintain its main interest rate at 5.25%, a 16-year peak, despite inflation hitting the bank’s target of 2%. The decision comes amid concerns from some members of the bank’s nine-member Monetary Policy Committee that certain inflation metrics, particularly in the services sector, remain high and could escalate if rates are lowered prematurely.

Governor Andrew Bailey of the Bank of England remarked, “It’s good news that inflation has returned to our 2% target,” but emphasized the importance of ensuring inflation remains stable, which led to the decision to keep the interest rate unchanged.

The committee’s vote saw seven members in favor of maintaining the current rate and two advocating for a cut. This vote mirrors the bank’s previous meeting’s outcome, and there has been no change in interest rates since August following several increases.

This decision was largely expected by economists but may be disappointing to the governing Conservative Party, as a rate cut could have provided a boost for Prime Minister Rishi Sunak in the upcoming U.K. general election, potentially lowering mortgage rates.

The Monetary Policy Committee made it clear that the upcoming election, likely to be won by the opposition Labour Party under Keir Starmer, did not influence their decision. Their focus remains on what is necessary to sustain the 2% inflation target over the medium term, independent of the election timing on July 4.

Recent data released on Wednesday showed that annual inflation, as measured by the consumer prices index, dropped to 2% in May from 2.3% the previous month, with a significant reduction in food prices contributing to this decline. Although this marks a decrease in inflation, it does not imply falling prices but rather a slower rate of increase compared to the past few years—a period marked by a cost of living crisis affecting millions in Britain.

The drop in inflation follows nearly three years of rates exceeding the target. The last occurrence of a 2% inflation rate was in July 2021, before factors such as supply chain disruptions during the COVID-19 pandemic and subsequent geopolitical events like Russia’s invasion of Ukraine drove prices up, particularly for energy.

In response to the soaring inflation, which peaked at over 11% in late 2022, the Bank of England, alongside other central banks like the U.S. Federal Reserve, initiated a series of aggressive interest rate hikes from near zero. While these hikes have helped mitigate inflation, they have also had a dampening effect on the British economy, which has seen minimal growth since recovering from the pandemic.