Interest rates in the UK held at 5%

After voting 8-1 to not change monetary policy, the Bank of England held interest rates at 5%.

The nine-strong monetary committee announced that it would adopt a “gradual” approach to lowering the interest rates, as the inflation rate is expected to rise for the remainder of the year.

The market expected the decision to be made. Recent inflation figures show that consumer price inflation was stable in August at 2.2%, but core prices and key measures of inflation underlying were up last month.

Bank of Canada expects the CPI to end at 2,5%, due to rising energy costs for households starting next month. This figure is lower than 2.75 percent forecast in August, and is due to lower-than expected petrol prices following the decline of oil prices. The Bank targets an annual inflation rate of 2%.

Mortgage rates are reduced when interest rates fall. This helps to stimulate the economy.

Andrew Bailey, Governor of the Bank, stated: “Inflationary Pressures have continued to ease ever since we reduced interest rates in August. The economy is progressing as expected. We should be able reduce rates over time if this trend continues. However, it is important that the inflation rate remains low.

MPC narrowly voted 5-4 in August to lower interest rates, bringing the base rate down from 5.25 to 5%. The financial markets are expecting another quarter-point reduction before the end the year. This is a more gradual loosening of monetary policy compared to the US Federal Reserve which made a half-point reduction on Wednesday.

Swati Dhingra was the sole policymaker who voted for a rate reduction this month. She argued that inflation had been “on a steady downward trajectory for quite some time”. Sir Dave Ramsden voted for the rate to remain unchanged, after voting in favor of a cut at three previous meetings.

The majority of MPC members said that “in the absence of material development, a gradual approach would be warranted to remove policy restraint”.

CPI is now close to Bank’s target of 2 percent, after the energy price shocks and supply chain disruptions caused by the pandemic were absorbed. Bank rate-setters said they were closely monitoring the development of wages and inflation within the services sector. This rose from 5.3% to 5.8% in August. The goods price inflation rate has been negative for two months in a row.

The Bank also decided to reduce its government bond stock by another £100billion over the next 12 months, which will put pressure on the government’s finances.

After the decision on interest rates, the pound reached a new two-year high versus the dollar. It increased by 0.5 percent to $1.329. The pound gained against the US dollar after the Fed cut interest rates by a large amount.