The Bank of England has maintained interest rates at 4%, with all eyes now turning to the upcoming Budget.
Monetary Policy Committee (MPC) members voted to keep rates on pause, although there were some dissenting voices, with four members voting to reduce them by 0.25 percentage points to 3.75%.
The MPC report noted that inflation (as measured by the consumer prices index) is “judged to have peaked”, reflected in an easing of pay growth and services price inflation.
“The risk from greater inflation persistence has become less pronounced recently and the risk to medium-term inflation from weaker demand more apparent, such that overall, the risks are now more balanced. But more evidence is needed on both,” it said.
As a result, the Bank of England is “likely to continue on a gradual downward path” in regards to interest rate policy.
Brad Holland, director of investment strategy at JP Morgan Personal Investing, said the growing speculation of tax hikes and spending cuts in the upcoming Budget meant the Bank has decided to “buy time” before making its next major move.
“Two events are set to shape whether a fourth and final rate cut this year will be possible at the next meeting. The next set of inflation figures on 19 November will show if further progress has been made to bring down price increases, in particular services inflation,” he said.
“Following hot on the heels will be the Budget, and a chance to see if the chancellor’s policy decisions are inflationary or can meaningfully lower the cost-of-living for UK households.”
George Brown, senior economist at Schroders, said the central bank made the “right decision”, noting that inflation is still almost double the 2% target.
“The Bank will be in a stronger position after the dust settles from the Budget, armed with additional jobs and inflation data, to judge whether further easing is warranted in December,” he said.
However, he noted that the cautious approach taken so far could change if the chancellor doubles her fiscal headroom by £20bn, as has been rumoured.
“Alongside mooted tax cuts on household energy bills, if these measures materialise, they could create scope for the Bank to cut multiple times next year,” he said.
The real-world impacts of held interest rates
Interest rates affect many parts of the financial system but for most people their impact is most keenly felt on two main areas: mortgages and savings rates.
Alice Haine, personal finance analyst at Bestinvest, said: “For households, the implications of keeping interest rates on hold are mixed. Savers may welcome the prospect of higher returns for longer, but borrowers – particularly those burdened with large mortgages or heavy debts – face continued strain from elevated repayments on home loans and personal debts.”
Holding rates may be seen as a reprieve for savers, as savings rates have been edging down in recent months due to rate cuts, but with inflation still sticky, real returns are shrinking.
“Savers should avoid sitting on the sidelines waiting for conditions to improve. Money languishing in an account paying a dismal rate should be moved swiftly to a more competitive option to ensure it works as hard as possible,” said Haine.
Meanwhile, although keeping rates on hold means mortgages are unlikely to fall, she said there is good news as a more relaxed lending environment, slower house price growth and strong wage gains have helped to ease affordability pressures.
“However, today’s decision to hold rates, coupled with uncertainty over potential property tax hikes in the upcoming Budget may feel unsettling for homeowners and prospective buyers alike,” she noted.