Bank of England Holds Steady: Interest Rate Unchanged Amid Inflation Fears

The Bank of England (BoE) has kept its interest rate at 4.75% for the second consecutive month, maintaining its stance against rising inflation. The decision, announced on December 19, 2024, comes as the BoE grapples with balancing the risks of further rate cuts exacerbating inflation against the potential benefits for economic growth and stability.

Inflation has been a persistent concern for the BoE, with the consumer price index (CPI) inflation rate peaking at 11.1% in October 2022. Although inflation has since eased, it remains above target, and the BoE is wary of reigniting inflationary pressures. The Monetary Policy Committee (MPC) acknowledged the recent slowdown in inflation but noted that it remained above target and was expected to rise again in the coming months due to base effects and persistent global cost pressures.

The BoE's decision to keep the interest rate unchanged reflects its assessment of the medium-term inflation outlook. The Bank's Monetary Policy Report (MPR) in May 2024 projected that CPI inflation would return close to the 2% target two and three years out, conditional on a modest tightening priced into the yield curve at that date. However, since then, events have moved on quite a lot, with activity recovering more than expected and large upside surprises in prices and indicators of labor market tightness.



The BoE's decision to maintain the interest rate at 4.75% has significant implications for mortgage holders and the housing market in the UK. According to the Bank of England, around 3 million households are still paying less than 3% on their mortgage interest rates and will face an increase when they remortgage. The Institute for Fiscal Studies estimates that interest rate increases between December 2021 and December 2023 are likely to have caused 320,000 more people with mortgages to be in relative poverty after housing costs. This means that mortgage holders will have less disposable income to spend on other goods and services, which could lead to a decrease in consumer spending and a slowdown in economic growth.

The Bank of England's decision to keep the interest rate at 4.75% also has consequences for businesses, particularly those with high debt levels. Rising borrowing costs can lead to increased financing expenses, potentially squeezing profit margins and cash flows. Businesses may face difficulties in servicing their debts, which could result in defaults or restructuring. Additionally, higher interest rates can make it more expensive for businesses to invest in expansion or new projects, potentially slowing down economic growth.

In conclusion, the Bank of England's decision to maintain the interest rate at 4.75% reflects its assessment of the medium-term inflation outlook and its mandate to maintain price stability. The decision has significant implications for mortgage holders, the housing market, and businesses, particularly those with high debt levels. As the economic outlook evolves, the BoE will continue to monitor the situation closely and adjust policy as needed to ensure a sustainable return of inflation to the 2% target.