Kate Andrews Kate Andrews

Interest rates may start to fall – but not yet

(Photo: iStock)

The Bank of England has held interest rates at 5.25 per cent for the third consecutive time. This was the expected outcome of the Monetary Policy Committee’s latest vote, but it wasn’t unanimous. There were six MPC votes to hold rates but three to raise it to 5.5 per cent. No one voted to cut. This speaks to the biggest challenge the Bank faces right now: how to balance getting the inflation rate back to target without tipping the economy into recession. But markets expect the next movement to be downwards – so much so that mortgage rates are already falling in anticipation.

The MPC today urges markets not to get ahead of themselves and says that inflation risks are ‘skewed to the upside’. This is why it continues to lean in a slightly hawkish direction. And while rates may be falling internationally, UK inflation is expected to be stubborn – and above the 2 per cent target all next year. Even now it remains more than double the Bank’s target (4.6 per cent at the last count).

With a return to target not expected until 2025, Andrew Bailey, the Bank's governor, has made clear that rates are expected to stay high for some time, not least because of the lag (the rate rises that took place mid-way through the year are still working their way into the system). Today’s minutes from the MPC make the same point, noting that ‘monetary policy will need to be sufficiently restrictive for sufficiently long to return inflation to the 2 per cent target sustainably in the medium term, in line with the Committee’s remit.’

So if rates are on the way down, it won't be anytime soon. The Bank is walking on a tightrope, as evidenced by yesterday’s monthly GDP figures, which showed a 0.3

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