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Article information Author, Michael Reis Role, Business reporter, BBC News 8 July 2024, 16:02 BST
Updated 24 minutes ago
Bank of England rate officials said interest rates should be kept on hold next month rather than cut for the first time in more than four years.
Jonathan Haskell, a member of the Bank of England's Monetary Policy Committee (MPC), which sets the UK's key interest rate, said he would prefer to keep rates on hold at 5.25% until there is greater confidence that inflation pressures have “subsided sustainably”.
Interest rates are being kept at their highest level in 16 years to curb rising consumer prices, but rising rates are raising borrowing costs, including mortgages.
The bank had previously appeared to hint at the possibility of cutting interest rates in August after official data showed that inflation – a measure of the pace of price growth – had slowed to 2 percent, in line with its target.
This has led some lenders to slightly reduce mortgage rates.
Financial markets are currently pricing in about a 60% chance of interest rates being cut next month for the first time since 2020.
But Haskell, who voted to keep rates unchanged in June, said other policymakers should remain cautious, citing concerns about the UK's jobs market and labour shortages.
He said that while there were “fairly encouraging signs” about falling inflation, it is likely to remain above 2 percent for “quite a long time.”
“The labor market remains tight and I am concerned it may still be getting worse,” he said in a speech scheduled for later Monday.
“We want to keep interest rates unchanged until we have greater confidence that underlying inflation pressures have subsided sustainably.”
Some mortgage lenders are factoring in the decline in base rates as part of a wider range of considerations when setting the interest rates they charge on new fixed rate deals.
And banks want to ensure they remain competitive but are not overwhelmed with mortgage applications and struggle to process them.
Nationwide and Virgin are the latest banks to cut interest rates, following other lenders in recent weeks, with Nationwide announcing a cut of up to 0.3 percentage points on Tuesday.
The UK prime interest rate also reflects the interest rates offered by major banks on savings accounts.
The average interest rate on a two-year fixed mortgage was 5.93% on Monday, while the average interest rate on a five-year fixed mortgage was 5.51%, according to financial information company MoneyFact.
The average easy-access savings rate was 3.11%.
Rising energy and food costs have put pressure on household budgets in recent years, and rising borrowing costs have increased financial pressure on households.
Economic Effects
The Bank of England is independent of the government and its main role is to keep inflation stable at 2%.
In recent years, in response to high inflation, the bank has raised interest rates and then kept them high. The bank also predicts that inflation may rise slightly again in the coming months.
The theory behind rising interest rates is that they will slow inflation, but they could also dampen economic growth and lead to less job creation as companies may put off investing and hiring.
In the UK, the proportion of working-age people in employment remains lower than before the COVID-19 pandemic.
Inflation can be affected by labor shortages, which force employers to raise wages to attract and retain employees, which can result in prices rising as businesses try to cover their costs.
Haskell is an external member of the bank's MPC and professor of economics at Imperial College Business School.
“As these shocks spread through the economy and labor markets remain tight and weakening, inflation is likely to remain above our target for a significant period of time,” Haskell said in his speech.
His term on the MPC is due to end on August 31.