Bank of England pauses historic rate hikes as UK inflation falls

By Hanna Ziady, CNN

London (CNN) — The Bank of England paused its historic interest rate hiking campaign for the first time in nearly two years Thursday after inflation fell unexpectedly in August.

The decision keeps the main borrowing cost for commercial banks in the United Kingdom at 5.25% — still the highest level since February 2008 following the longest-running series of successive increases in benchmark interest rates in at least a century. The Federal Reserve also kept rates on hold Wednesday, as did Switzerland’s central bank earlier on Thursday.

The news will provide some relief to UK households struggling to make mortgage repayments, and could lead to cuts in mortgage rates in the weeks ahead.

The decision to pause came down to a knife-edge vote. Five members of the Bank of England’s monetary policy committee supported maintaining the current rate, while four members preferred to increase it by a quarter of a percentage point to 5.5%.

The central bank did not rule out further rate increases, however, and hinted that borrowing costs would need to be kept high for a prolonged period to ensure a sustained fall in inflation.

“Inflation is still not where it needs to be and there is absolutely no room for complacency,” Governor Andrew Bailey said in a video posted to the bank’s website. “We’ll be watching closely to see if further increases are needed. And we will need to keep interest rates high enough for long enough to ensure that we get the job done.”

Despite this hawkish tone, many analysts expect no more hikes.

“The bank’s job is done,” said Paul Dales, chief UK economist at Capital Economics. But he added that rates would stay at their current level for longer than investors expect.

‘Huge relief’ to households

For households battling rising prices and high borrowing costs, the Bank of England’s decision will come as a “huge relief,” said Alice Haine, a personal finance analyst at Bestinvest, an online investment platform.

“The really good news is that interest rates may have finally reached their peak in the current tightening cycle, offering consumers a glimmer of hope that sky-high borrowing costs may finally be coming to an end,” she added.

Hina Bhudia, a partner at Knight Frank Finance, a mortgage broker, noted that, together with better inflation figures, the decision would “pave the way for lenders to make more cuts to mortgage rates in the weeks ahead.”

UK mortgage rates have eased over the past few weeks, although remain well above their level a year ago. The cost of the average two-year fixed-rate mortgage was 6.58% on Thursday, according to financial product comparison website Moneyfacts. That compares with a rate of 4.24% last September and just 2.38% in September 2021.

Cooling inflation

The odds of a pause by the Bank of England rose sharply Wednesday after data showed that UK consumer prices increased 6.7% in August compared with a year earlier.

Economists polled by Reuters had forecast inflation would rise to 7% — from 6.8% in July — because of higher oil prices.

The downside surprise was driven by falls in the cost of hotel stays and air fares, as well as food prices rising less than in August 2022, according to the Office for National Statistics.

Core inflation, which strips out volatile food and energy costs, and services inflation also slowed sharply, signaling an “inflexion point has been reached in underlying inflation,” according to Martin Beck, chief economic adviser to the EY ITEM Club.

A recent slowdown in UK economic activity and signs that the job market is weakening could drag inflation down further.

After increasing slightly in the second quarter, gross domestic product shrank 0.5% in July, with output declining in most sectors.

And although wages are still increasing at a record rate, unemployment has ticked up and vacancies have dipped below 1 million for the first time in two years.

Company insolvencies, meanwhile, jumped 19% in August compared with a year earlier to more than 2,300. That’s higher than levels seen while government support measures were in place during the pandemic, and also higher than pre-pandemic numbers.

“There is an air of underlying weakness,” Dales of Capital Economics said about July’s GDP data. “It would make sense that underlying economic growth is weakening, given that the dampening effect of higher interest rates should be building now.”

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