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The Bank of England did not rule out further rate hikes.
London CNN –
The Bank of England halted its historic interest rate hike campaign on Thursday for the first time in nearly two years after inflation unexpectedly fell in August.
The decision keeps key borrowing costs for commercial banks in the United Kingdom at 5.25% – the highest level since February 2008, following the longest series of gradual increases in benchmark interest rates in at least a century. Is. The Federal Reserve also kept rates on hold on Wednesday, as did Switzerland’s central bank on Thursday.
The news will provide some relief to UK households struggling to make mortgage repayments, and could lead to mortgage rates being cut in the coming weeks.
The decision to stop was taken on the basis of knife edge voting. Five members of the Bank of England’s monetary policy committee supported maintaining the current rate, while four members preferred to raise it by a quarter percentage point to 5.5%.
However, the central bank did not rule out further rate hikes and indicated that borrowing costs would need to remain high for a longer period of time to ensure a sustained decline in inflation.
“Inflation is still not where it should be and there is no room for complacency,” Governor Andrew Bailey said in a video posted to the bank. Website. “We will keep a close eye on this to see if further increases are needed. “And we have to keep interest rates high for a long time to make sure we get the job done.”
Despite this hawkish tone, many analysts expect no further increases.
“The bank’s work is done,” said Paul Dales, chief UK economist at Capital Economics. But he said rates will remain at their current levels longer than investors expect.
For households struggling with rising prices and high borrowing costs, the Bank of England’s decision will come as a “huge relief”, said Alice Hahn, personal finance analyst at BestInvest, an online investment platform.
“The really good news is that interest rates have finally reached their peak in the current tightening cycle, giving consumers a ray of hope that skyrocketing borrowing costs may finally be coming to an end,” he said.
Hina Bhudia, partner at Knight Frank Finance, a mortgage broker, said that, coupled with better inflation data, the decision “will pave the way for lenders to cut mortgage rates further in the coming weeks.”
UK mortgage rates have declined over the past few weeks, although they remain well above levels a year ago. The average two-year fixed-rate mortgage cost 6.58% on Thursday, according to financial product comparison website MoneyFacts.
The possibility of a freeze by the Bank of England rose sharply on Wednesday after data showed consumer prices in Britain rose 6.7% in August from a year earlier.
Economists polled by Reuters had predicted inflation would rise to 7% from 6.8% in July due to higher oil prices.
The negative surprise came with food prices rising less than in August 2022, along with declines in hotel accommodation costs and airfares, according to the Office for National Statistics.
According to Martin Beck, chief economic advisor at the EY ITEM Club, core inflation, which strips out volatile food and energy costs, and services inflation have also slowed sharply, signaling “an inflection point in underlying inflation.” Has arrived”.
The recent slowdown in UK economic activity and signs that the job market is weakening could push inflation further down.
After a small increase in the second quarter, gross domestic product shrank 0.5% in July, with output falling in most sectors.
And although wages are still growing at a record rate, unemployment has increased and vacancies have fallen below 1 million for the first time in two years.
Meanwhile, the company bankruptcy rate in August rose 19% from a year earlier to more than 2,300. This is higher than levels seen during government support measures during the pandemic, and even higher than pre-pandemic numbers.
“There is an environment of underlying weakness,” Capital Economics’ Dales said of the July GDP data. “It makes sense that the impact of higher interest rates should now be building, given that underlying economic growth is weakening.”