Bank of England leaves interest rates on hold at 5.25%

The Bank of England left interest rates on hold for the sixth time on the trot despite increasing confidence that inflation has fallen back at its target level of 2%.

Its Monetary Policy Committee (MPC) voted 7 to 2 to leave the benchmark lending rate at 5.25%, the level it has been at since August last year.

The decision was widely expected but will nonetheless disappoint businesses labouring under heavy levels of debt, and home owners on tracker mortgages that move in line with the Bank of England's rate decisions.

Governor Andrew Bailey said he was “optimistic that things are moving in the right direction” after “encouraging news on inflation.”

The FTSE-100 jumped nearly 40 points to a new all time high of 8,393 on hopes that today will be the last hold decision in the current cycle.

The number of MPC members voting for a cut went up from one to two with Swati Dhingra and Dave Ramsden backing an immediate quarter point reduction to 5%.

In new language seen in the City as more “doveish” the MPC said it will “consider forthcoming data releases and how these inform the assessment that the risks from inflation persistence are receding.” It comes ahead of the announcement of the official inflation rate for April later this month. The Office for National Statistics is expected to say that the Consumer Prices Index (CPI) went up by only around 2% in April, following a big cut in the energy bills cap at the start of the month. The CPI stood at an annual rate of 3.2% in March.

There are growing hopes that a return to 2% inflation could convince a majority of MPC members to vote for a quarter point cut when they next meet in June. However the decision is still see as on a knife-edge with more hawkish members still worried about wages growth and the higher rate of price inflation in the services sector.

Official figures tomorrow are expected to show that the economy emerged from a brief recession in the first quarter of this year.

Nicholas Hyett, Investment Manager at Wealth Club, said: “The Bank of England continues to diagnose persistent inflation as the major danger facing the UK economy. However, it’s an increasingly delicate balancing act, and there’s a real risk the economic cure might end up being worse than the disease..”

Andy Mielczarek, CEO of digital bank Chetwood Financial, said: “Any call to race ahead of the Fed and cut the base rate early would have been short-sighted. Holding at 5.25% was the right decision by the Bank of England, as there remains enough uncertainty and stickiness around inflation to merit caution for a while longer.

“The reality is that despite recent decreases in inflation, we have yet to hit the Bank’s 2% target. We are seeing signs that the economic landscape is warming, so we must ensure that we have the stability and resilience necessary for future growth.

“A high-interest environment means difficulties for those with variable mortgage payments contributing to an already-high cost of living, but these are necessary evils for the UK’s economic recovery. As long as the base rate stays high, savers need to shop around to maximise the returns they are getting from the savings market and get their financial goals back on track.”

Professor Joe Nellis, MHA’s Economic Advisor and Professor of Global Economy, Cranfield School of Management, said: “The decision to hold rates today should come as no surprise, as the appetite for an interest rate cut from the MPC has shifted in recent weeks. There is no silver bullet to taming inflation and the Bank of England will not want to be seen to be jumping the gun to cut rates.

While Headline inflation has fallen sharply from a peak of 11.1% in October 2022 to 3.2% in March there is still some way to go to bring it down to the official 2% target – and to keep it there.

“The path to low and sustained inflation is being frustrated by several factors, including strong wage growth, oil price hikes, and global tensions, all of which are negatively impacting efforts to squeeze inflationary pressures out of the economy. Nor is the mood music from the Fed in Washington and the ECB in Frankfurt helping.

“With oil prices on the rise again there are fears that inflation could even increase for a few months, delaying an interest rate cut until 1 August at the earliest.

Lily Megson, Policy Director at advisers My Pension Expert, said: “While high interest rates are often touted as good news for savers, the harsh reality is that an unchanged base rate feels like Groundhog Day for Britons.”