UK interest rates on hold over Middle East and inflation threats

Bank of England governor Andrew Bailey says interest rates will remain at 5.25 per cent, the highest level in almost 116 years

The Bank of England had raised interest rates in 14 consecutive meetings to deal with surging inflation. PA

The Bank of England has left interest rates unchanged at 5.25 per cent, it announced on Thursday, as fears over conflict in the Middle East, Red Sea tensions and inflation weighed on the decision.

It means Britain's central bank has kept interest rates at their highest level in almost 16 years, even as investors look for hints of rate cuts to come.

The bank had hiked interest rates at 14 consecutive meetings to deal with surging inflation, leading to painfully high borrowing costs for businesses and mortgage holders.

“Global GDP growth has remained subdued, although activity continues to be stronger in the United States. Inflationary pressures are abating across the euro area and United States. Wholesale energy prices have fallen significantly,” the bank said on Thursday.

“Material risks remain from developments in the Middle East and from disruption to shipping through the Red Sea.”

One of the bank's primary targets is an inflation rate of 2 per cent.

Bank of England governor Andrew Bailey said there had been “good news” on inflation in recent months, but that at 4 per cent, it is still double the target rate.

He said the prediction that inflation is expected to fall to 2 per cent in the summer is not enough for him to cut rates.

“I think the key thing to stress is that what we look at is the level of the degree of persistence of inflation,” he said.

“So as I said earlier, you’re right that inflation is now falling faster than we expected. And as I said, we do expect it to come near to target this spring. And that is, of course, very good news.

“But we don’t expect that to be the sustained level, it’s going to rise again somewhat thereafter.

“And it’s really that ‘thereafter period’ that we are most focused on when setting policy. We have to look through the short-run impact that energy prices in particular are having.”

The nine-member monetary policy committee was split, with two voting for a quarter-point increase and one voting for a quarter-point cut.

Central bankers have held rates since September after a cooling in the rate of inflation, but in December inflation unexpectedly rose to 4 per cent, an increase that tempered market expectations that the central bank would cut borrowing costs.

“The restrictive stance of monetary policy is weighing on activity in the real economy and is leading to a looser labour market.' the bank said.

“In the committee’s February forecast, the risks to inflation are more balanced. Although services' price inflation and wage growth have fallen by somewhat more than expected, key indicators of inflation persistence remain elevated.

“As a result, monetary policy will need to remain restrictive for sufficiently long to return inflation to the 2 per cent target sustainably in the medium term in line with the MPC’s remit.”

On Wednesday, the US Federal Reserve held rates steady, but also surprised financial markets with its cautious statement that it “does not expect it will be appropriate” to cut rates.

The Bank of England, like the Fed and other central banks around the world, raised interest rates aggressively from near zero to counter price rises that had been stoked first by supply-chain issues during the coronavirus pandemic, and then by Russia’s invasion of Ukraine, which pushed up food and energy costs.