Bank of England holds interest rates at 5.25%

Receive free UK interest rates updates

We’ll send you a myFT Daily Digest email rounding up the latest UK interest rates news every morning.

The Bank of England has held interest rates at 5.25 per cent after a knife-edge vote that is likely to signal the peak of borrowing costs after almost two years of rate rises.

Thursday’s decision sent the pound to its lowest level in six months against the dollar as investors pared back expectations of further rate rises.

Following better than expected inflation data a day before, the bank’s Monetary Policy Committee was split five to four in favour of leaving rates unchanged, with BoE governor Andrew Bailey casting the final and decisive vote.

It was the first pause after 14 consecutive rate rises since the start of the tightening cycle in December 2021.

On Wednesday, the US Federal Reserve also voted to keep its benchmark rate steady after its own series of hikes took borrowing costs to their highest level since the financial crisis.

As price rises slow after the worst inflation shock in 40 years. the world’s leading central banks have steered clear of declaring victory over inflation but are all signalling that rates are at or near their peak.

Although the MPC made little comment about its future actions, the majority backing the decision to hold indicated that further rate rises were unlikely to be necessary in coming months.

The five MPC members wrote of the importance that current level of rates be “maintained” — rather than increased — until progress had been made in bringing inflation down to the BoE’s 2 per cent target.

Yael Selfin, chief economist at KPMG UK, said that interest rates had “potentially reached their peak in this cycle”, while noting that BoE officials would be monitoring data for reassurance that policy was restrictive enough to bring inflation down.

But swaps markets still give roughly a 70 per cent chance of a final quarter point rise before March next year to 5.5 per cent.

Sterling, which had already weakened after Wednesday’s inflation data, extended its losses to trade down 0.4 per cent after hitting a six-month low of $1.2239 against the dollar.  

Real estate stocks briefly gained after the MPC vote, with Barratt Developments and Berkeley Group rising by around 2 per cent before giving up most of their gains.

The MPC decision was a welcome piece of good economic news for prime minister Rishi Sunak as he seeks to take charge of the political agenda by delaying key net zero targets.

It also followed Wednesday’s surprise dip in inflation to 6.7 per cent for August, which put Sunak on course to hit his target of “halving inflation” this year.

Bailey said inflation would continue to fall but cautioned there was “no room for complacency” and BoE officials did not wholly rule out another rate rise in months to come. “Further tightening in monetary policy would be required if there was evidence of more persistent inflationary pressures,” the MPC said.

The minority of members who had supported increasing rates countered that there was evidence of such pressures, arguing that higher borrowing costs would “address the risks of more deeply embedded inflation persistence”.

The committee also unanimously agreed to raise the pace of its quantitative tightening process for the year ahead from £80bn in 2022-23 to £100bn in 2023-24.  

The MPC said it considered interest rates to be the active tool of monetary policy, adding that the effect of its asset sales on borrowing costs was “modest”.