The Bank of England made headlines on September 19, 2024, as it decided to keep interest rates steady at 5%. This move, expected by many market analysts, signals the central bank's cautious approach to monetary policy amid shifting inflation rates and the wider economic backdrop.
Andrew Bailey, the Governor of the Bank of England, confirmed during the announcement, "Monetary policy will need to continue to remain restrictive for sufficiently long until the risks to inflation returning sustainably to the 2% target in the medium term have dissipated." This call to maintain high rates reflects the Bank's focus on ensuring inflation remains low, with the annual inflation rate currently measured at 2.2%. This figure, albeit slightly higher than the Bank’s ideal target, shows substantial progress from the 11.1% peak seen back in late 2022, emphasizing the need for continued vigilance.
Following the quarterly rate cut of 0.25 percentage points last month, which was the first since the onset of the Covid pandemic, Bailey expressed optimism about the direction of future cuts. He noted, "I think interest rates are going to come down, I’m optimistic on this front," but was quick to advise against precipitous changes. "It is also very important we keep inflation low," he stated, underscoring his cautious optimism.
The monetary policy committee, which voted by 8-1 to maintain the rate, indicated its readiness to scale back the interest rates if sustained evidence confirms the inflation rate stays around target levels. Interestingly, the lone dissenting vote was from independent economist Swati Dhingra, who argued for immediate action by proposing to cut rates by 0.25 points.
Market analysts remain mixed about the future of the Bank's monetary policy. Many expect rate decreases as early as Novemberif inflationary pressures continue to recede. Financial markets appear to be anticipating this shift, with predictions of the Bank possibly reducing the rate to 4.75% at its next policy meeting.
Looking internally, Bailey revealed signs of improving economic conditions. He stated, “We’ve beaten the problem we saw from these huge global shocks,” referencing the economic interruptions caused by the pandemic and the Ukraine war. He cited improvements reflected through higher mortgage approvals, which recently reached their highest levels since September 2022.
Yet, the recovery remains fragile. Despite progress on inflation, the overall growth forecast remains subdued, expecting only modest expansions of about 0.3% between July and September. Bailey acknowledged the impact of higher living costs, stating how consumers are increasingly cautious about their spending habits amid wage pressures and rising rents.
Indeed, many individuals are already feeling the squeeze from elevated expenses. For example, families across the UK are grappling with surging rental prices. Sofia and her husband James, for example, faced with rising rents, moved to save costs, illustrating how rising borrowing costs and inflation can affect household decisions.
To address these continued financial pressures, the Bank also announced its intention to shrink its portfolio of government bonds. This move aims to gradually reduce the government bond purchases by approximately £100 billion ($132.5 billion) over the next year, shifting its balance sheet from the historically high levels seen during previous crises.
While inflation remains on the path toward the Bank’s target, external economic factors continue to pose risks. The global economic climate, particularly with interest rate decisions from the US Federal Reserve, also influences the Bank's decision-making process. The US recently announced its first rate reduction of the year at half-a-percentage point, which may pressure the Bank of England to follow suit if UK inflation eases significantly.
Overall, the Bank of England's decision is seen as part of its cautious navigation through the economic uncertainties and persistent inflationary pressures, balancing the need for growth against the imperative to subdue inflation. The financial community is keeping their ears close to the ground as they watch for any shifts or adjustments to policy as the economic indicators evolve.
For many households, this news will have substantive impacts, affecting everything from mortgage payments to other personal finance related decisions. Therefore, the coming months will be pivotal for both the Bank and everyday Britons as they hope for tangible improvements on the path to economic recovery.
