The Bank of England plans to maintain its interest rates at 5.25% for the fifth consecutive month despite lower than expected inflation in February. The Bank might not provide any hints about potential future rate cuts.
The main goal of the Bank is to manage inflation to prevent harm to the economy. Inflation, or the rate of price increase, has decreased since a peak of 11.1% in October 2022. However, prices are not dropping, they are simply increasing at a slower rate.
The Bank’s Governor, Andrew Bailey, stated that they will wait for solid evidence of inflation stability before thinking about rate cuts. The Bank aims to achieve a 2% inflation rate and adjusts the interest rate accordingly. Bailey dismissed speculation about a possible decrease in rates and stated that any changes will be reactionary instead of anticipatory.
The Bank is committed to maintaining the balance between achieving their inflation target and adapting to changing economic conditions. Following 14 consecutive hikes, the Bank maintained the current interest rate to moderate the pace of price increases without hampering the slow economy.
Even though maintaining the interest rate increase financial pressure for those with loans, it creates a more favorable environment for savers. This is the Bank’s attempt to navigate through economic turbulence, ensuring that these measures do not tip the balance too far in any direction.
The Bank considers various economic factors to decide the most appropriate interest rate. For example, in February, wage growth declined to 6.1% while services inflation remained high at 6.1%. The Bank may choose to lower interest rates to stimulate spending and encourage borrowing in the event of falling wage growth. If continued high services inflation is evident, the Bank might raise the interest rates to cool the economy.
Other leading banks such as the European Central Bank and the US Federal Reserve have also recently paused their rate hikes. Among the G7, the UK holds one of the highest interest rates worldwide. The decrease in inflation has been partially attributed to a reduction in food and dining costs, which fell to 3.4% in February. However, the high energy costs remain a concern.
Though higher than expected borrowing in February has led to concerns in the financial sector, the UK economy is expected to rebound by 2024 according to experts. In an unexpected occurrence, a rare Victorian banknote from the Bank of England’s Birmingham branch was recently sold for £38k. Meanwhile, new GDP figures are awaited with anticipation by economists who hope for signs of recovery from the economic downturn.
