Bank of England keeps key interest rate unchanged at 16-yr high of 5.25%

The Bank of England kept its main interest rate unchanged at a 16-year high of 5.25 per cent on Thursday even though inflation continues to drop from multi-decade peaks.

The decision was widely anticipated in financial markets and comes a day after the US Federal Reserve also left its key interest rate unchanged. But unlike the Fed, the Bank of England gave few explicit indications that it was getting ready for a series of interest rate reductions in the months to come.

The Swiss National Bank went the other way on Thursday, with a surprise cut to its main interest rate by a quarter of a percentage point.

Market expectations that lower UK interest rates were on the horizon got a boost Wednesday with news that inflation fell to a 2.5-year low of 3.4 per cent in February more than anticipated and is now not far off the Bank of England's target rate of 2 per cent.

The bank's rate-setting Monetary Policy Committee acknowledged that inflation has been trending lower and could fall below the 2 per cent target in the second quarter of the year.

However, it said that key indicators of inflation persistence, such as wages, "remain elevated and that interest rates will need to remain restrictive for sufficiently long or at relatively high levels to get inflation back to its goal.

Bank Gov. Andrew Bailey said there have been further encouraging signs that inflation is coming down but that more evidence was needed to be sure that inflation will fall to target and stay there.

We're not yet at the point where we can cut interest rates, but things are moving in the right direction, he said.

One of the nine rate-setters voted for a quarter-point reduction, while the other eight backed no change, including two who had voted for a hike last month. That change in the split of the vote shows the bank is slanting toward easing borrowing costs.

With wage growth still elevated and underlying inflation pressures likely to pull inflation higher again in the second half of the year, we think we are still a few months away from the first rate cut," said Luke Bartholomew, senior economist at asset management firm abrdn. "However, once cuts start, ongoing economic weakness could see rates fall quite materially over the next few years.

Central banks around the world raised interest rates aggressively in late 2021 from near zero to counter price rises first stoked by supply chain issues during the coronavirus pandemic and then by Russia's invasion of Ukraine, which pushed up food and energy costs.

Higher interest rates which cool the economy by making it more expensive to borrow, thereby bearing down on spending have contributed to easing inflation worldwide, though they also have affected economic activity.

The British economy has barely grown over the past year and growth this year is expected to be fairly muted.

Britain's governing Conservative Party hopes that lower inflation and the ensuing decline in interest rates may trigger a feel-good factor ahead of a general election that has to take place by January 2025.

Opinion polls show the main opposition Labour Party way ahead and on track for a big victory over the Conservatives, who have been in power since 2010.

Most speculation is that Prime Minister Rishi Sunak will call an election in the fall, when the economic backdrop is likely to be more benign than it is now.