UK interest rates remain at 5.25 per cent

Bank of England keeps rates steady at a 15-year high for a second consecutive month

The Bank of England has left interest rates unchanged at 5.25 per cent. PA

The Bank of England has left interest rates unchanged at 5.25 per cent for the second month in a row, as economists warn of a possible recession.

The BoE on Thursday emphasised that interest rates, now at a 15-year high, would not be falling any time soon.

"We've held rates unchanged this month but we'll be watching closely to see if further rate increases are needed," said the bank's governor, Andrew Bailey. "It's much too early to be thinking about rate cuts."

The BoE's Monetary Policy Committee (MPC) voted by six to three to keep interest rates on hold, which was in line with predictions.

"The MPC's latest projections indicate that monetary policy is likely to need to be restrictive for an extended period of time," the BoE said.

"Further tightening in monetary policy would be required if there were evidence of more persistent inflationary pressure."

A year ago UK inflation topped 11 per cent, but as the effect of 14 increases in interest rates started to feed through, inflation was down to 6.7 per cent in September, albeit still more than three times the BoE's target of 2 per cent.

Nonetheless, when the BoE met in September, it downgraded its outlook for the third quarter of this year, predicting that gross domestic product would rise by only 0.1 per cent, compared with the 0.4 per cent increase it had forecast a month earlier.

The BoE now expects UK economic growth to be flat next year and a sluggish 0.25 per cent in 2025.

"The decision to leave interest rates unchanged at a time when recession fears are on the rise and fresh conflict in the Middle East risks derailing the energy market indicates the central bank is nervous about increasing borrowing costs for households and businesses," said Alice Haine, personal finance analyst at Bestinvest.

"Whether this is the end of interest-rate rises is unclear, with the BoE monitoring inflationary pressures carefully, while the dampening effects from 14 rate rises between December 2021 and August this year continue to feed through into the economy."

Business groups gave the decision a cautious welcome but warned that the longer interest rates remain at 15-year highs, the more damage will be done to already struggling companies and households.

“The decision from the Bank of England to hold rates again for a second month running will be welcome news to hard-pressed households and businesses dealing with higher borrowing costs," said Anna Leach, deputy chief economist at the Confederation of British Industry.

“However, with the backdrop of high inflation, wage growth still well above levels consistent with the inflation target and given services inflation actually rose in September’s data, monetary policy will need to remain tight for some time in order to decisively drive inflation back to target."

With the possibility that any further rises will tip the UK into a recession, many analysts feel UK interest rates have now peaked.

"It’s far from surprising that the majority of policymakers want the economy to take a breather from this painful cycle of rate hikes," said Susannah Street at Hargreaves Lansdown.

"The potential for oil prices to shoot higher remains a worry, but not a major concern right now. So, barring further shocks, it looks highly likely we have hit the peak in the cycle, but cuts are still not expected until the second half of next year.”

Terraced housing in south-east England. The Labour Party claims 3,400 households a day will face higher mortgage costs from Thursday until the beginning of May 2024, as they come off historically cheaper fixed-rate deals. PA

Mortgage time bomb

Meanwhile, Britain's opposition Labour Party on Thursday published analysis indicating 630,000 more homeowners would be hit by higher borrowing costs before local elections next year.

The analysis, based on figures from the Office for National Statistics, claimed more than 3,400 households will be forced to remortgage each day until the beginning of May, as they come off their fixed-rate deals.

The new deals will have significantly higher rates of interest, with a profound effect on household budgets. However, for many analysts, the BoE's decision to leave interest rates on hold will come as a slight relief.

"While many expect interest rates to stay higher for longer, as thousands more borrowers come off low fixed rates into the current environment, this could have a profound effect," Andrew Montlake, a mortgage broker at Coreco, told Newspage on Thursday.

"The bank is walking a narrow tightrope now and its next decisions will prove crucial not just for borrowers and the economy at large, but also weigh in on the upcoming general election next year."