What next for interest rates – as central banks try to avoid unnecessary pain
Inflation held steady at 2.2% in August, in line with expectations and confirming that, while prices and interest rates rose like a rocket, they will return to earth like a feather.
The latest figures for the Office for National Statistics show goods prices finally falling – minus 0.9% in the year to August – but services inflation remains uncomfortably high at 5.6%.
This matters because services, a broad category that includes everything from coffee shops to corporate lawyers, make up 80% of the economy and are the primary contributor to underlying “core inflation” rising to 3.6%.
All eyes on the Bank of England
Wages are one of the key drivers of this increase and the long-held concern at the Bank of England that, once the price shocks of the energy and food inflation passed, upward pressure on pay would leave inflation “sticky”.
Hence the cautionary tone that accompanied the Bank’s 0.25 percentage point rate cut last month, the first in what is expected to be a series of steps down in the coming months.
Keep up with all the latest news from the UK and around the world by following Sky News
How fast that descent should be will be at the heart of discussions today when the Monetary Policy Committee meets to make a decision that will be announced tomorrow lunchtime.
The markets put the prospects of a rate cut at just 26%, with a greater chance of another cut coming at the following meeting in November. Absent further external shocks there is a determination that now rates have started to move they should go in only one direction.
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Whether they cut now or later, the direction of travel is in step with other major economies.
The European Central Bank made a 0.25 percentage points cut last week and later today the US Federal Reserve will follow, the only argument there being whether it is a quarter or half-point reduction.
All these central banks are trying to pull off the same trick; to dampen the chance of inflation catching fire again, avoid unnecessary pain for consumers and businesses, and deliver a soft landing for the economy.
Business
UK interest rates an outlier after decision to hold but Bank of England forecasts inflation rise to 2.5%
There has been no change to the UK interest rate despite the US and European central banks all moving to cut in the last week.
The Bank of England has kept the interest rate at 5% as official figures this week showed some measures of price rises grew.
It follows the first cut in more than four years.
The rate set by the Bank impacts how much lenders charge to borrow money, so it affects how expensive mortgages or credit card bills are.
But there was no consensus on the decision. One of the nine rate decision-makers voted for a cut.
There were signals of the Bank’s direction of travel from governor Andrew Bailey.
Where to next?
If the economy continues to progress in line with its expectations “we should be able to reduce rates gradually over time”, he said.
But, he said, “we need to be careful not to cut too fast or by too much”.
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Market expectations are currently for a cut at the next meeting in November followed by a further one in December.
The latest forecasts from the Bank are for inflation to rise again, reaching 2.5% by the end of the year.
How did we get here?
Interest rates were brought to a high last seen during the 2008 global financial crash in an effort to bring down spiralling inflation.
More expensive borrowing can choke economic demand and slow price rises.
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Bank of England holds interest rates
The Bank is tasked with bringing inflation down to 2%. It currently stands at 2.2%.
The US central bank, the Federal Reserve, brought interest rates down by 0.5 percentage points to 4.75% to 5% on Wednesday and the European Central Bank (ECB) reduced borrowing costs last week to 3.5%.
Unlike the UK, the US interest rate is a range to guide lenders rather than a single percentage.
Reaction
Sterling strengthened, following the news and against a weakened dollar a pound bought $1.33, the highest amount in more than two years.
Business
Why Bank of England is in no rush to lower interest rates – even though some think decision to wait is dangerous
Slowly does it.
That’s the overarching message to take away from the Bank of England‘s latest monetary policy decision. Unlike the Federal Reserve, the US central bank, which decided yesterday to cut interest rates by half a percentage point – more than many had expected – the Bank wanted to signal today that it’s in no rush.
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Alongside the decision to leave borrowing costs on hold at 5%, the Bank’s governor also signalled that he and the rest of the Monetary Policy Committee were in no rush to cut them again. Provided there aren’t any inflation surprises, he said, “we should be able to reduce rates gradually over time”. He added: “But it’s vital that inflation stays low, so we need to be careful not to cut too fast or by too much.”
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The Bank of England has held the base interest rate at 5%
Even so, the Bank is expected to carry on cutting rates in the coming months. Indeed, economists think the Bank will cut rates in November by at least a quarter percentage point, followed by more cuts next year, taking borrowing costs down towards 3% by next summer.
Keep up with all the latest news from the UK and around the world by following Sky News
That’s largely because inflation is now considerably lower than in recent years, and because there is evidence that high interest rates are starting to weigh down economic activity. The longer those rates stay high, the bigger the depressive impact they have on the UK.
But that raises another issue. For some economists, the Bank of England’s gradualist approach is dangerous. They worry that higher rates, which deter companies and individuals from spending and investing, are causing unnecessary damage.
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That helps explain why one of the MPC members, Swati Dhingra, voted to reduce rates at this meeting.
But the rest of the committee was of one mind – no point in rushing.
Whether they are right is something we’ll find out in the coming months.
There has been no change to the UK interest rate despite the US and European central banks all moving to cut in the last week.
The Bank of England has kept the interest rate at 5% as official figures this week showed some measures of price rises grew.
It follows the first cut in more than four years.
The rate set by the Bank impacts how much lenders charge to borrow money, so it affects how expensive mortgages or credit card bills are.
But there was no consensus on the decision. One of the nine rate decision-makers voted for a cut.
Where to next?
There were signals of the Bank’s direction of travel from governor Andrew Bailey.
If the economy continues to progress in line with its expectations “we should be able to reduce rates gradually over time”, he said.
But, he said, “we need to be careful not to cut too fast or by too much”.
Market expectations are currently for a cut at the next meeting in November followed by a further one in December.
How did we get here?
Interest rates were brought to a high last seen during the 2008 global financial crash in an effort to bring down spiralling inflation.
More expensive borrowing can choke economic demand and slow price rises.
The Banks is tasked with bringing inflation down to 2%. It currently stands at 2.2%.
The US central bank, the Federal Reserve, brought interest rates down by 0.5 percentage points to 4.75% to 5% on Wednesday and the European Central Bank (ECB) reduced borrowing costs last week to 3.5%.
Unlike the UK, the US interest rate is a range to guide lenders rather than a single percentage.
Reaction
Sterling strengthened, following the news and against a weakened dollar a pound bought $1.33, the highest amount in more than two years.
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