The Bank of England has held the base rate at 3.75%, leaving borrowing costs unchanged as policymakers try to balance rising inflation and wage growth against the need to boost a slowing economy.
The decision by the Monetary Policy Committee (MPC) was widely anticipated. Inflation climbed to 3.4% in December – the first increase in five months – while unemployment remained at a four-year high of 5.1% in the three months to November. Wage settlements, however, are still running at around 3.5%, adding to concerns that the upward price pressure that it exerts could prove stubbornly persistent.
Higher borrowing costs are already acting as a drag on activity, and economists are now expecting the Bank to trim its near-term growth outlook for the Uk. Officials, though, remain cautious about cutting rates too quickly after December’s reduction from 4%, concerned that a premature easing could allow inflation to rebound before it is fully under control.
Inflation has fallen a long way from its peak
The Bank said of its decision: “Inflation has fallen a long way from its peak of over 10% three years ago, and we now expect it to be back to our 2% target this spring. There should be scope for some further cuts to Bank Rate this year.”
“Monetary policy is being set to balance the risk that higher inflation is more persistent against the risk that weaker labour demand and household spending take inflation below target.
“If the economy and the outlook for inflation evolve as we expect, there should be scope for some further cuts to Bank Rate this year. But we’ll have to judge the latest information and data at each of our meetings and set whatever interest rate is necessary to make sure that inflation stays low and stable.”
Markets are now focused on the Bank’s 19 March meeting, with traders pricing a strong chance of a cut by the end of April. Expectations for the rest of the year are now fairly evenly divided, with many economists forecasting one further reduction and others expecting two cuts if wage growth moderates and inflation continues on its downward trajectory.
Industry reaction
Reacting to the news, there was some disappointment in the property industry that there were no further cuts, although they were reassured by the stability a freeze in the base rate brings. Many also add that it helps reduce uncertainty at a time when buyers, lenders and investors are already adjusting to a higher-rate environment, and that predictability matters more than the speed of future cuts.
Estate agencies report that steady rates are helping sustain early-year momentum, with enquiry levels, viewings and offers reported to be strong. Several firms added that predictable borrowing costs are encouraging both domestic movers and international buyers to proceed with plans rather than wait for policy shifts. Agents operating in the prime and London markets also noted continued interest from high-net-worth and overseas purchasers, arguing that the current status quo reinforces confidence when allocating capital into UK property.
Pause already priced in to mortgages
Mortgage lenders and brokers, on the other hand, emphasised that the market had already priced in a pause in base rate reductions. And with high levels of competition, lenders are continuing to sharpen fixed-rate products and loosen affordability criteria. Many expect gradual reductions later in the year but argue that a slow, controlled path is healthier for transaction volumes than rapid swings in policy.
The outlook, though, could change very rapidly if there are any major changes in either inflation or the economy.
