In a recent announcement, the Bank of England has reaffirmed its commitment to maintaining historically high interest rates in the near future as part of its strategy to combat elevated inflation, a challenge that sets it apart from many other developed economies.
Despite projections hinting at the possibility of a recession and the anticipated stabilization of the UK's economic outlook in the upcoming years, the Bank of England opted to leave interest rates unchanged at 5.25% for the second consecutive meeting. This decision follows fourteen successive rate hikes.
Aside from that, the Bank has confirmed that borrowing costs will remain elevated. Consequently, this is likely to lead to a modest strengthening of the British pound against the euro and the dollar, although the full impact of these long-term rate increases will take some time to materialize.
During a press conference, the Governor of the Bank of England, Andrew Bailey, emphasized that the recent dip in inflation, which has receded from its highest levels since the 1980s, as well as a less robust economic outlook, does not translate into an imminent rate cut.
"We will be watching closely to see if further increases in interest rates are needed," he said during the press conference. "But even if they are not needed, it is much too early to be thinking about rate cuts."
He also added that complacency was not an option. Inflation continues to exceed the acceptable target of 2%, and the Bank will uphold elevated interest rates until inflation aligns with this target.
The Bank of England's decision to maintain rates mirrors similar moves by the European Central Bank and the US Federal Reserve. These central banks are all closely observing the outcomes of their strategies to combat surging inflation, one of the most significant challenges in recent times.
Bailey acknowledged the potential risks related to the Middle East conflict, which might lead to higher energy prices and subsequently push up inflation. However, as of now, this has not happened.
While inflation has retreated from its peak of 11.1% just over a year ago to 6.7% according to the latest data, it remains considerably higher than the BoE’s 2% target.
The Bank anticipates a stable UK economy from July to September, with modest growth of 0.1% in the final quarter of the year. In addition, it projects zero growth in 2024 and a mere 0.25% growth in 2025. That being said, the return to a 2% inflation rate is only anticipated by the end of 2025, marking a six-month delay compared to prior forecasts.
The Bank of England foresees the unemployment rate increasing to 5% in two years, up from the current level of 4.2%, depending on the dynamics of market interest rates.
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