The Bank of England has maintained its base interest rate at 5%, with Governor Andrew Bailey indicating a gradual reduction in borrowing costs may be on the horizon. Bailey noted that while inflation has decreased significantly, the Bank will require more evidence of sustained low inflation before implementing further rate cuts.
Inflation remained at 2.2% last month, slightly above the Bank’s target. The decision to hold rates was widely anticipated, following a reduction from 5.25% in August—the first cut since the pandemic began in 2020. Bailey expressed optimism about future rate decreases but stressed the importance of caution to avoid cutting rates too quickly or excessively.
“The decision to keep rates steady was guided by the need to address persistent inflationary pressures,” Bailey said. He added that inflation must remain low to justify any further reductions. The base interest rate influences borrowing costs, affecting mortgages, credit cards, and savings returns. While higher rates have led to increased borrowing costs, they have also benefited savers.
The elevated rates have impacted many households, including James and Sofia, who recently moved to a smaller home due to rising rent. Their rent had increased by £100 a month to £1,650, prompting their move to a £1,400 rental property. Sofia, who had to return to work early from maternity leave due to financial strain, reported challenges such as relying on food banks and struggling with fuel costs.
Despite these issues, the Bank of England’s latest assessment suggests some positive economic developments. Mortgage approvals have risen to their highest level since September 2022, and there are reports of improving real incomes. However, the Bank anticipates inflation will climb to around 2.5% towards the end of the year, with the UK economy showing signs of gradual improvement.
Bailey noted that the economic impact of major global events, including the Covid-19 pandemic and the Ukraine war, has lessened. “We’ve managed to navigate past the severe effects of these global shocks,” he said, though he acknowledged that economic recovery has been slow. The Bank expects economic growth between July and September to be 0.3%, down from the 0.4% expansion previously anticipated.
The UK economy has experienced sluggish growth in recent years, prompting the new Labour government to pledge reforms aimed at revitalizing economic performance. The Bank of England’s cautious approach reflects ongoing concerns about inflation and economic stability as it looks to balance rate adjustments with broader economic conditions.
