The Bank of England kept interest rates at their highest levels in 15 years on Thursday, even as policymakers were again divided over the best course of action to curb high inflation.
Six members of the central bank’s nine-member interest rate-setting committee voted to keep rates at 5.25% amid signs that inflation will continue to slow and the economy is weakening. But they said tight monetary policy would be needed for a “prolonged” period, a tougher stance than before, according to minutes of this week’s policy meeting.
“Higher interest rates are working and inflation is falling,” Andrew Bailey, the bank’s governor, said in a written statement. He voted to maintain rates. But the bank needed to see inflation fall “towards” its 2% target, he added, and policymakers would therefore “watch closely whether further rate hikes are necessary”.
As Britain prepares for this long period of high rates, the economic outlook has darkened. The economy would stagnate for most of the next two years, the bank said in projections accompanying Thursday’s decision. The forecast also highlighted the challenge policymakers face in stamping out high inflation, which remained at 6.7% in September. In 2024 and 2025, the inflation rate is expected to be slightly higher than predicted a few months ago. For example, inflation would slow to 3.4 percent at the end of next year, compared to a previous forecast of 2.8 percent.
Three other committee members voted in favor of raising rates by an additional quarter point to head off the risks of “persistence of more deeply entrenched inflation,” according to meeting minutes. Even as the economy weakened, household incomes rose due to lower inflation and economic output indicators remained positive, they said.
It was the second consecutive meeting in which rates were held steady, ending a nearly two-year streak of rate hikes aimed at combating stubbornly high inflation. At the previous meeting at the end of September, a slim majority of five votes voted in favor of maintaining rates.
Thursday’s decision mirrors those made by the Federal Reserve on Wednesday and the European Central Bank last week to leave interest rates unchanged because it was clear that restrictive monetary policy was cooling their economies and easing inflationary pressures. All of these central banks have left open the possibility of further rate hikes, but have shifted their focus to how long rates will remain at these levels to ensure inflation returns to its 2% target.