London, UK – The Bank of England (BoE) delivered a pivotal decision on Thursday, opting to retain its key interest rate at 5.25 percent, marking the highest level seen in over 15 years. This measured move follows a series of strategic interest rate hikes aimed at addressing persistently high inflation and the associated challenges posed to state borrowing costs.

In a 6-3 vote, the BoE’s Monetary Policy Committee (MPC) chose stability over change, signaling a steadfast commitment to a stringent monetary policy. This decision stands in contrast to the recent actions of the US Federal Reserve, which opted to freeze borrowing costs, hinting at a potential shift towards rate cuts in the upcoming year.

Minutes from the BoE meeting underline the committee’s unanimous belief that monetary policy must remain sufficiently restrictive for an extended period to ensure a sustainable return of inflation to the two percent target in the medium term. Governor Andrew Bailey reiterated this stance in a letter to Finance Minister Jeremy Hunt, acknowledging that despite a notable drop to 4.6 percent in October, UK inflation remains the highest among G7 nations, more than double the BoE’s 2.0-percent target rate.

The MPC’s decision did not come without internal divisions. While six members advocated for maintaining the status quo, three pressed for an increase to 5.5 percent, citing credible evidence of persistent inflationary pressures. These differing views reflect the ongoing economic uncertainties, fueled in part by external factors such as the global energy crisis triggered by geopolitical events.

Recent official data depicting a larger-than-expected contraction of 0.3 percent in the UK economy for October underscored the impact of high-interest rates on economic indicators. This downturn, encompassing reduced construction, manufacturing, and services activity, followed a modest increase of 0.2 percent in September.

Finance Minister Jeremy Hunt acknowledged these economic challenges, cautioning that the string of rate hikes by the BoE has already begun to impact economic activity. The central bank had previously frozen borrowing costs in September and November, marking a pause after a series of 14 consecutive hikes.

Despite the challenging economic landscape, the BoE remains steadfast in its commitment to combat inflation. It acknowledges that the ongoing series of rate hikes may extend a cost-of-living squeeze, but reassures that UK retail banks are well-equipped to manage the fallout.

Retail banks, pivotal in transmitting BoE rate hikes to consumers with variable-rate home loans or expiring fixed-term deals, play a crucial role in shaping the economic response to monetary policy decisions. As the BoE maintains its stringent stance, attention now turns to the European Central Bank, slated to announce its latest monetary policy decision later today.
By: Montel Kamau
Serrari Financial Analyst
15th December, 2023