The Bank of England keeps the main interest rate fixed at 4.75% after inflation

The UK’s central bank has kept interest rates steady as inflation moves above target, even though Britain’s economy is faltering at best.

The Bank of England’s nine-member Monetary Policy Committee kept its key interest rate unchanged at 4.75% on Thursday with new data showing inflation rising to 2.6%, above the bank’s 2% target.

In response, the rate-setting panel, which last cut its key rate in November, is taking a cautious step because lower borrowing costs could cause further inflation. That is disappointing for many struggling sectors of the UK economy that have not been helped by cheap credit in a slow-growth environment. Britain’s economy has contracted for two consecutive months.

The UK’s central bank is set to hold interest rates later on Thursday as inflation rose above its target, although Britain’s economy is holding steady.

The Bank of England’s nine-member Monetary Policy Committee is expected to keep the bank’s key interest rate unchanged at 4.75% due to figures showing inflation rising to 2.6%, above the 2% target. With price pressures lifted in the key services sector, which comprises around 80% of the UK economy, and wages firming, there are few indications that inflation will return to target anytime soon. As a result, the rate-setting panel, which last cut its key rate in November, will take a more cautious approach, as lower borrowing rates could push up inflation.

That is disappointing for many struggling sectors of the UK economy that have not been helped by low interest rates in a slow-growth environment – in fact Britain’s economy has contracted for two months in a row.

“Continued price pressures will prevent the Bank of England from responding to low output and falling jobs by cutting interest rates,” said Andrew Wishart, economist at Berenberg Bank.

Few economists think that interest rates will drop significantly even in 2025. It’s a similar picture in the US, where the Federal Reserve strengthened hopes on Wednesday of tapering next year after cutting its rate recently. Critics say the Labor government’s first budget in October both increased inflationary pressures and slowed growth. A large increase in corporate taxes could see firms trying to cover the extra cost by raising prices or cutting back on hiring. The government says it needed to raise taxes to consolidate public finances and inject money into cash-starved public services.

However, inflation in the UK and around the world is much lower than a few years ago, because central banks significantly increased borrowing costs from close to zero during the coronavirus crisis when rates started to rise, primarily because of supply. many problems also due to Russia’s full-scale invasion of Ukraine which increased energy costs.

With inflation rates down from decade highs, central banks have begun to cut interest rates, although few, if any, economists think rates will return to the record lows seen in the years following the global financial crisis of 2008-2009.