LONDON (AP) — The Bank of England on Thursday kept its main interest rate at a 16-year high of 5.25%, even though inflation has fallen to its target of 2%.
In a statement, some policymakers on the bank’s nine-member Monetary Policy Committee voiced worries that some underlying measures of inflation, such as in the services sector, remain elevated, which could be stoked further if interest rates are cut too soon.
“It’s good news that inflation has returned to our 2% target,” said Bank of England Gov. Andrew Bailey. “We need to be sure that inflation will stay low and that’s why we’ve decided to hold rates at 5.25% for now.”
Seven members voted for no change while two voted for a rate cut. The vote was consistent with that seen at the bank’s meeting last month. Interest rates have been unchanged since August after a series of hikes.
The decision, which was widely anticipated by economists, is likely to disappoint the governing Conservative Party ahead of the U.K.’s general election in two weeks time. A cut would have been seized upon by Prime Minister Rishi Sunak as positive economic news, especially as it would have been accompanied by a fall in mortgage rates.
The panel insisted that the imminent election, which the main opposition Labour Party led by Keir Starmer is widely expected to win, had no bearing on its decision.
“The committee noted that the timing of the general election on 4 July was not relevant to its decision at this meeting, which would as usual be made on the basis of what was judged necessary to achieve the 2% inflation target sustainably in the medium term,” it said.
Figures on Wednesday showed inflation, as measured by the consumer prices index, fell to 2% in the year to May from 2.3% the month before with food prices providing the biggest downward contribution.
The decline does not mean that prices are falling - they are just rising at a slower rate than they have for the past few years during a cost of living crisis that has seen living standards drop for millions across Britain.
The fall in inflation follows nearly three years of above-target inflation. The last time inflation was at 2% was in July 2021 before prices started to shoot up, first as a result of supply chain issues during the coronavirus pandemic and then because of Russia’s invasion of Ukraine, which pushed up energy costs.
The Bank of England, like the U.S. Fed and other central banks, raised interest rates aggressively in late 2021 from near zero to counter the rapid increase in inflation, which hit a peak of above 11% in late 2022.
Higher interest rates — which cool the economy by making it more expensive to borrow — have helped ease inflation, but they’ve also weighed on the British economy, which has barely grown since the pandemic rebound.
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