Interest rates: Bank of England holds rate at 3.75 per cent as inflation fears continue
Bank of England policymakers have held interest rates at 3.75 per cent.
The Bank was widely expected to keep the rate at the same level as last month, as it continues to walk the tightrope of controlling inflation while trying to support economic growth. That being said, four of the nine members voted this morning to reduce it to 3.5 per cent.
The Bank’s Monetary Policy Committee announced its decision at midday. It delivered a cut to borrowing costs before Christmas, from four per cent to 3.75 per cent, which was the fourth reduction of the year.
Governor Andrew Bailey said at the time that the UK had “passed the recent peak in inflation and it has continued to fall”, but he cautioned that further cuts will be a “closer call”. Since that decision, official data has shown that inflation bounced back in December, rising for the first time in five months.
The rate of Consumer Prices Index (CPI) inflation came in at 3.4 per cent for the month, up from 3.2 per cent in November, with tobacco duties and airfares among the factors driving prices higher.
Today the bank said: “Although above the two per cent target currently, CPI inflation is expected to fall back to around the target from April, owing to developments in energy prices including from Budget 2025.
“Reflecting the impact of monetary policy, and consistent with evidence of subdued economic growth and building slack in the labour market, pay growth and services price inflation have generally continued to ease. The risk from greater inflation persistence has continued to become less pronounced, while some risks to inflation from weaker demand and a loosening labour market remain.”
Economists pointed to other datasets that the MPC will be keeping a close eye on, including gross domestic product (GDP) which returned to growth in November at 0.3 per cent. Wage growth has also continued to slow while unemployment remained at its highest level for nearly five years, the latest official data showed.
Evidence that the labour market is cooling is likely to be encouraging news for policymakers because it indicates that some pressures on inflation are reducing, but they will also be cautious of it weakening economic growth.
Edward Allenby, senior economic adviser at Oxford Economics, said: “The MPC will continue to face a delicate balancing act between supporting growth and preventing inflation from becoming entrenched, with forthcoming data on pay settlements likely to play a decisive role in shaping the next policy move.”
Mr Allenby is forecasting the next rate cut to come in April.