UK interest rates to stay higher for longer, Bank of England says


Supermarket workerImage source, Getty Images

By Dearbail Jordan

Business reporter, BBC News

Interest rates will stay higher for longer, the Bank of England has said for the first time, in an effort to battle soaring price rises.

The Bank revealed the tactic to try and curb the rising cost of living as it raised rates again to 5.25% from 5%.

Borrowing costs are now at their highest for 15 years, and will mean higher mortgages and loans payments but should also mean higher savings rates.

The Bank was more downbeat on growth, but said the UK would avoid a slump.

On Thursday, the Bank signalled for the first time that it would keep interest rates higher and that they would remain higher until it got UK inflation – the rate at which prices rise – under control.

Inflation slowed substantially to 7.9% in June, but remains nearly four times higher than it’s expected to be.

“We know that inflation hits the least well-off hardest and we need to make absolutely sure that it fall all the way back to the 2% target,” governor Andrew Bailey said.

The Bank also admitted that it could take slightly longer for inflation to slow, falling to normal levels by June 2025 rather than by the end of March 2025,

It has been putting up interest rates to try to slow price rises, with the aim of making it more expensive to borrow money and reducing people’s spending.

The Bank said the impact of its rate rises would begin to hit people and the economy harder next year, with growth continuing to be sluggish and smaller than it was before the pandemic for some time.

Rising food prices have been one of the biggest drivers of inflation, but the Bank said there was evidence that the increases were slowing, “albeit only gradually”.

The Bank also said there was no evidence that companies were benefiting from so-called “greedflation”, by putting prices up more than necessary to bolster profits.

It said “corporate profits have been little changed” over the past two years “suggesting that firms increasing prices to raise their margins is not currently a significant contributor to inflation”.

The minutes from this month’s meeting revealed that there was a three-way split between members of the Bank’s Monetary Policy Committee over the direction of interest rates.

Of its nine members, six, including the governor, voted for rates to rise to 5.25%. In contrast, two wanted a more aggressive increase to 5.5% while the remaining member voted to hold rates at 5%.

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