The Bank of England held interest rates at a 15-year high on Thursday, as policymakers sought to squeeze out inflationary pressures even amid signs of economic slowdown.
The bank’s key rate remained at 5.25 percent, following a faster-than-expected retreat in inflation, which dropped below 5 percent in October. Still, the inflation rate was more than double the central bank’s 2 percent target.
Troubling to some policymakers and analysts, the rate is also high compared to European neighbors, and workers on average are experiencing relatively fast wage growth, pushing up prices in the services sector. Indications that domestic price pressures remain quite strong mean traders are not expecting the central bank to cut rates until about the middle of next year. The bank’s policymakers were split on whether to keep rates steady, with a minority voting to raise them further.
“We’ve come a long way this year, and successive rate increases have helped bring inflation down,” Andrew Bailey, the governor of the bank, said in a statement. “But there is still some way to go.”
Globally, the struggle against high inflation has moved into a new phase as price growth peaked last year. Now, central bankers are focused on how to push inflation down to their targets, while managing the adverse effects of past rate increases. As the global economy weakens, policymakers are alert to when they might need to cut interest rates, but are cautious of signaling that these cuts will come too soon and risk reigniting inflationary pressures.
On Wednesday, the U.S. Federal Reserve held rates steady but policymakers indicated three cuts could take place next year. Later on Thursday, the European Central Bank is also expected to keep rates unchanged.
Reflecting the more challenging situation in Britain, where growth is weak but inflation pressures are still persistent, the Bank of England gave no indications that rate cuts could be imminent. The pound rose nearly 1 percent against the U.S. dollar after the rate decision as traders took stock of the differing views between the British and American central banks on future rate cuts.
A growing weakness in the British economy is becoming more evident, as household spending falters while housing investment contracts. The economy shrank 0.3 percent in October, data published on Wednesday showed. Monthly readings on economic growth can be volatile, but the data from the Office for National Statistics showed that the economy had been broadly the same size for about the past year and half.
The central bank expects the economy to flatline from now until 2025. But the bank does not expect inflation to return to the 2 percent target until late 2025.
“Monetary policy is likely to need to be restrictive for an extended period of time,” the central bank said.
The minutes of this week’s meeting of Bank of England policymakers highlighted the possibility that rates could rise again, saying that “further tightening” would be required if there was evidence of “more persistent inflationary pressures.”
Policymakers at the bank remain divided on how best to ensure inflation drops quickly and sustainably. Six of the bank’s nine-person rate-setting committee, including Mr. Bailey, voted to hold rates.
But the three others voted to increase the rate by a quarter point, arguing that there was a need to push back against the risk of “more deeply embedded” inflation, according to the minutes. Despite weak economic growth, household incomes, once adjusted for inflation, were improving and the labor market was tight. There was evidence of more persistent inflation as wage growth was higher than comfortable for meeting the inflation target and price growth in the services sector was “elevated,” the three policymakers said.
