The Bank of England has held interest rates at their highest level since 2008, despite UK inflation returning to its official 2% target last month.
The Bank’s governor Andrew Bailey said policymakers “need to be sure that inflation will stay low and that’s why we’ve decided to hold rates at 5.25% for now”.
The decision comes a day after official figures showed the rate of inflation hit the Bank’s 2% target in May for the first time in nearly three years, prompting the Prime Minister to declare “we’ve got there” after the milestone was reached.
However, some policymakers on the Bank’s nine-person Monetary Policy Committee (MPC) felt that “more evidence of diminishing inflation persistence was needed” before they could safely cut rates.
In particular, they felt that services inflation – which looks only at service-related prices such as hospitality and culture – had remained stubborn, and wage growth was rising faster than forecast.
But two members of the committee – Swati Dhingra and Dave Ramsden – voted for a reduction again as they argued that inflation looks set to remain at normal levels.
Furthermore, a summary of the MPC’s meeting revealed that, for other members, the policy decision was “finely balanced” because they felt services inflation was putting less pressure on the overall rate.
It indicates that the policymakers were somewhat split on the economic data.
“As part of the August forecast round, members of the committee will consider all the information available and how this affects the assessment that the risks of inflation persistence are receding,” the MPC summary read.
Meanwhile, the latest decision comes two weeks before the UK holds its General Election, but policymakers stressed that the timing of the election was “not relevant to its decision” on rates.
The hold decision has been not met with widespread approval by business leaders in Northern Ireland.
NI Chamber of Commerce chief executive Suzanne Wylie said: “Our most recent quarterly economic survey showed that interest rates are a growing concern for members, particularly for those in the services sector.
“Our focus is on stimulating sustainable economic growth, and if we are to boost the region’s competitive proposition, that means keeping costs to business, including the cost of borrowing, as low as possible.
“While the Bank of England is clearly taking a cautious approach now, a much-anticipated rate cut at the right time should help to facilitate business growth by encouraging investment.”
Alan Lowry, FSB’s NI policy chair, said: “Small businesses are disappointed by this decision. They are facing challenges on multiple fronts and were hoping the Bank would have seen fit to help ease the high costs of doing business which they face on a daily basis.
“Instead, this decision undermines the potential for growth, with small firms struggling to access affordable finance, curtailing their ability to expand.”
But Ross Boyd, founder of Belfast-based chartered accountancy RBCA, said the decision was unsurprising, adding: “If inflation remains at 2%, a rate cut is likely in the autumn, but until then this decision will be felt by millions. The real impact of high interest isn’t about the price of a pint of milk - it’s about the tick, tick, ticking mortgage timebomb.”
