The Bank of England has kept interest rates on hold for the third successive time at 5.25%, its highest level since the 2008 financial crisis. Setting itself apart from the US Federal Reserve, which signalled on Wednesday that it is preparing for multiple cuts in US interest rates next year, the Bank of England indicated that the UK still has a long way to go. The Bank said rates would need to remain at high levels for “sufficiently long” to return inflation back to its 2% target set by the government. “But there is still some way to go,” Andrew Bailey, the Bank’s governor warned. “We’ll continue to watch the data closely and take the decisions necessary to get inflation all the way back to 2%.”
Borrowing costs remain at their highest level in 15 years with the Bank’s monetary policy committee (MPC) leaving interest rates unchanged at 5.25% for a third consecutive time. Three members voted to raise rates to 5.5%. The panel said the choice had been a difficult one, between leaving rates on hold and restarting its most aggressive cycle of rate increases in decades. “The decision whether to increase or to maintain Bank rate at this meeting was again finely balanced between the risks of not tightening policy enough when underlying inflationary pressures could prove more persistent, and the risks of tightening policy too much given the impact of policy that was still to come through,” it said.
This comes after the UK GDP shrank unexpectedly by 0.3% in October as businesses and households face growing pressure amid the cost-of-living crisis. The Bank said it expected GDP growth to be broadly flat at the end of this year and over the coming quarters. City economists said Britain’s worsening economic outlook meant the Bank was unlikely to be able to stick to its plan of keeping rates at current high levels, with the pricing in financial markets indicating five UK rate cuts by the end of 2024 to 4%.
The Federation of Small Business (FSB) said Britain’s worsening economic outlook meant small businesses would suffer a twofold blow with the interest rates hold and GDP falling. “A third hold in a row was widely expected, but yesterday’s worse than expected GDP result has to be setting alarm bells ringing among economists and policymakers,” FSB Chair Martin McTague said. The cost of borrowing continues to remain high, and consumers are likely to spend less as inflation continues to hit a dent in small businesses, McTague warned.
“The MPC needs to be responsive to indications that economic damage is setting in and should consider moving the timetable for rate cuts up,” he added. “Small firms are often interest rate bellwethers, as a result of their own index-linked borrowing, and also as the businesses that are most affected by downturns in consumer spending prompted by higher rates. With the lending environment for small firms having become far less hospitable, they are increasingly less able to get the funding they need to invest for the future – or even to keep going.
“Adding to the difficulties many would-be borrowers face is the issue of personal guarantees being demanded by banks for relatively small sums. That is why we have sent a super-complaint to the Financial Conduct Authority to ask it to investigate, and to consider expanding its regulatory perimeter to cover more small business loans.”