The Old Lady pauses for breath – for now

For the first time in almost two years, the Bank of England paused interest rate hikes in Britain today – a surprise move which comes as welcome relief to all those with a mortgage or running a small business.

This ends a run of 14 consecutive rises, which began at the end of 2021, and went against market expectations that the BoE’s Monetary Policy Committee would hike rates again this morning from 5.25 per cent to 5.5 per cent. 

While 5.25 per cent is still the highest level in 15 years, Britain’s biggest building society, Nationwide, has responded positively to the news, confirming that its mortgage rate will be cut by up to 0.31 percentage points tomorrow.

The MPC’s decision was a close call, with committee members voting 5 – 4 to hold the rate, and the Governor, Andrew Bailey, making the decisive vote. 

Those in favour of the pause will have been influenced by yesterday’s sunnier-than-expected inflation data: despite warnings that headline inflation could rise temporarily in August due to a spike in fuel prices, it fell to 6.7 per cent. Core inflation – which is considered a key indicator of underlying inflationary pressures – fell too, albeit by a modest 0.7 per cent. 

The Bank says it was also influenced by the “increasing signs” that higher interest rates are starting to take a toll on the UK economy. While inflation has fallen faster than anticipated in recent months, recent growth statistics have come in weaker than expected. 

The time lag effect of monetary tightening means it takes a while for previous interest rates to feed through into the economy. But the latest GDP figures – showing that the UK economy shrank by 0.5 per cent in July – suggests that successive rate rises are starting to take their toll. 

Interest rate hikes are intended to squeeze consumer spending which in turn limits the amount businesses can push up prices. But if rates are too punitive they risk pushing the economy into recession. It’s a fine balancing act. As the Institute of Directors, which represents business leaders, said today, to raise rates further “would have risked administering an overdose before the existing medicine has had enough time to full take effect.”

The big uncertainty now is whether today represents the peak of interest rates or is simply a pause ahead of another later rise. Cebr economists still reckon there could be further tightening before the end of the year.

What we can say with more certainty is that rates are unlikely to start falling anytime soon. 

The Bank’s governor confirmed there had been no discussion about reducing rates during the MPC’s meeting today. Such talk, he insisted, “would be very, very premature.” 

Even so, mortgage holders and small businesses have reason to be hopeful that the worse of the pain is behind them. 

Write to us with your comments to be considered for publication at letters@reaction.life