Bank of England holds interest rate at 5%

The Bank of England (BoE) has kept interest rates at 5% but investors predict two cuts will happen before the end of the year, with the first expected to take place in November.

This decision follows a report showing UK inflation, which tracks the rise in consumer prices, remained at 2.2% last month, slightly above the BoE’s 2% target.

BoE governor Andrew Bailey has previously warned the Bank must "make sure inflation stays low and be careful not to cut interest rates too quickly or by too much".

The Monetary Policy Committee (MPC) has expressed ongoing concerns about inflation, particularly the elevated levels in the crucial services sector, which accounts for around 80% of the UK economy.

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The BoE’s decision contrasts with the more aggressive actions taken by other central banks. In the US, the Federal Reserve cut its interest rates by half a percentage point on Wednesday, marking its first reduction since 2020. The Fed’s new benchmark rate now sits between 4.75% and 5%, a move that some analysts viewed as unexpectedly bold in its fight against inflation.

Fed chair Jerome Powell said the super-sized cut was "timely" and "a sign of our commitment not to get behind."

Across the Channel, the European Central Bank (ECB) has also opted for more decisive action, enacting two consecutive rate cuts. Last week, the ECB lowered its main deposit rate from 3.75% to 3.5%, signalling a strong commitment to supporting growth in the eurozone.

Interest rates determine borrowing costs for a range of financial products, including mortgages and credit cards, as well as returns on savings. While UK rates were cut for the first time since March 2020 last month, borrowing costs remain high.

Michael Foote, editor-in-chief of the financial comparison site, Quotegoat.com, said: “Every year, millions of Brits turn to borrowing to make Christmas merrier, but with interest rates remaining high, repaying these debts can drag on for much longer. As we approach the festive season, with rising energy bills and escalating holiday costs, meticulous planning becomes crucial. Stick to a rigorous budget for gifts, food, and socialising to sidestep the pitfalls of unnecessary debt."

The decision to keep the base rate unchanged means mortgage repayments are unlikely to shift in the short term, but many homeowners on fixed-rate deals still face the prospect of higher repayments once their current arrangements expire in the coming years.

Read more: Eurozone inflation falls to 2.2% after ECB interest rate cuts

Paul Heywood, chief data and analytics officer at Equifax UK, said: “With house prices also at a two-year high, home buyers, whilst hopeful for another cut, will be grateful for no further rate increases and start to feel the benefit from relief in mortgage rates. Nonetheless, affordability remains a significant challenge for consumers, as average repayments on new lending remain 53% higher than levels observed in January 2022.”

The BoE is widely expected to reduce borrowing costs at its next meeting in November, especially as it will have the benefit of assessing the government’s budget, set to be announced on 30 October.

The newly elected Labour government faces the challenge of addressing a ￡22bn hole in public finances. With potential tax increases and spending cuts on the horizon, such measures could dampen economic growth and apply further downward pressure on inflation.

Interest rate futures are pricing in two more cuts, in November and December, to put the end-year rate at 4.5%.

"Having multiple data points to really assess how fast and how speedy the disinflation narrative is building in the UK, that's something we don't think we will get until the November decision," said Sanjay Raja, chief UK economist at Deutsche Bank.

Analysis by research firm Capital Economics suggests UK rates will hit 4% by the end of 2025.

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