The Bank of England announced its decision to keep its main interest rate unchanged at 5.25%, its highest level in 15 years. This decision, widely expected by analysts and financial markets, comes as part of the bank's ongoing efforts to curb inflation and bring it back to its 2% target.
General context and historical background of the decision
The decision to hold interest rates steady comes after an unprecedented run of 14 consecutive rate hikes initiated by the Bank of England in late 2021 to combat a surge in inflation that had gripped the UK and global economies. This surge was fueled by multiple factors, most notably supply chain disruptions following the COVID-19 pandemic and soaring energy and food prices exacerbated by the war in Ukraine. This tight monetary policy significantly increased borrowing costs in an effort to curb demand and reduce price pressures.
Although UK inflation has fallen significantly from its peak of over 11% in 2022, it remains above the Bank of England's target. The Monetary Policy Committee's decision to maintain current rates indicates its continued concern about underlying inflationary pressures, particularly in the services sector and wage growth, and its preference for a wait-and-see approach to ensure inflation does not rise again.
The importance of the decision and its expected impact
This decision has significant repercussions on various levels. Domestically, continued high interest rates mean continued pressure on households and businesses. Mortgage holders face higher costs when renewing their loans, and borrowing costs for businesses remain high, which could affect investment and hiring decisions. Conversely, savers benefit from higher returns on their deposits.
On the macroeconomic front, the Bank of England expects inflation to move towards its 2% target sooner than previously estimated, but at the same time it lowered its forecast for UK economic growth in 2026 to 0.9%, compared to a previous estimate of 1.2%. This reflects the difficult balance the bank faces between controlling prices and supporting economic growth, which is showing signs of weakness.
Internationally, the Bank of England's decision aligns with the stances of other major central banks, such as the US Federal Reserve and the European Central Bank, which have also adopted a "wait-and-see" policy following monetary tightening cycles. This synchronization of policies impacts exchange rates, as investors closely monitor any signals regarding the timing of interest rate cuts, which has now become a primary focus for global markets.
Services sector indicators
Indicating some resilience in the economy, the S&P Global Services Purchasing Managers’ Index (PMI) rose to 54.3 in January, its highest level in several months. This growth in the UK’s dominant services sector suggests that economic activity may be better than expected at the start of the year, but it also presents a challenge for the central bank, as the sector’s strength could contribute to continued inflationary pressures.
