Interest rate: Bank of England announces base rate will remain at 5.25% after unexpected fall in inflation

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Analysts had predicted that the interest rate could jump to the highest level since February 2008 but after an unexpected fall in inflation, this outcome became less likely

The Bank of England has today (21 September) announced that the interest rate level will remain at 5.25%, the first time it has remained stagnant since November 2021.

The Monetary Policy Committee (MPC) has been expected to increase the interest rate once again as the country continues to deal with the cost of living crisis. Experts predicted a rise from 5.25% to 5.5%. This would have been the highest base rate level since February 2008.

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However, this outcome became less likely according to economists, after it was announced that the UK's inflation rate had actually decreased in August. In a surprise to many, the ONS confirmed that the August inflation rate had dropped from 6.8% to 6.7%, the lowest level in 18 months.

The Bank of England had previously predicted the inflation rate to increase to 7.1% throughout the month owing to rising fuel prices. However, counteracting this was lower hotel and air fare costs and a slowdown in food price rises.

However the a majority of the MPC voted in favour of keeping the interest rate at 5.25%, with five in favour of keeping rates at the current level, while four voted in favour of increasing the rate to 5.5%.

While the interest rate will remain the same, the Bank warned that the UK's economy is now expected to grow at a weaker rate than previously expected due to "subdued" activity linked to the recent rise in borrowing costs. The Bank now predicts that the economy will grow by “only 0.1%” in the third quarter of 2023, a drop from the previously forcasted 0.4%.

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Minutes from the meeting stated: “Although some of this downside news could prove erratic, underlying growth was likely to be weaker than the 0.25% per quarter built into the August projection for the second half of 2023,

Andrew Bailey, governor of the Bank of England, said: “Inflation has fallen a lot in recent months and we think it will continue to do so. That’s welcome news.

“But there is no room for complacency. We need to be sure inflation returns to normal and we will continue to take the decisions necessary to do just that.”

Chancellor Jeremy Hunt said that the announcement was representative of the fact that the country is starting to see the “tide turn against high inflation”. He said: “We are starting to see the tide turn against high inflation, but we will continue to do what we can to help households struggling with mortgage payments,” he said.

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“Now is the time to see the job through. We are on track to halve inflation this year and sticking to our plan is the only way to bring interest and mortgage rates down.”

Upon the announcement, the pound sterling dropped 0.7% to 1.226 US dollars and was 0.5% lower at 1.151 euros.

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