Bank of England Halts Aggressive Interest-Rate Hike Cycle Amid Recession Concerns
The Bank of England has paused its aggressive interest-rate hike cycle, due to growing concerns about an impending recession outweighing worry about inflation. After 14 consecutive rate hikes since December 2021 when rates were at 0.1%, the central bank decided to maintain the key rate at 5.25%. The Monetary Policy Committee was split, with five members voting to keep rates steady and four advocating for an increase to 5.5%. Governor Andrew Bailey, holding the deciding vote, opted to maintain the rate.
Although the Bank of England signaled a temporary pause, it emphasized readiness to respond if inflation, currently more than three times above the 2% target, doesn’t decrease as expected. Market indicators and many economists are increasingly betting that UK interest rates may have already peaked. This shift in sentiment led to a depreciation of the pound against the dollar. Investors now anticipate minimal further tightening in the coming months.
The decision to halt rate hikes brings relief to households and businesses grappling with rising borrowing costs since the end of 2021. Concerns about the economic outlook played a role in the decision, with data showing a contraction in output, rising unemployment, and declining job vacancies.
The Bank of England has revised its GDP growth forecast downward, and inflation is expected to drop below 2% in the medium term. Higher rates have had a significant impact on homeowners, with a £15 billion repayment burden expected. Some MPC members have cautioned against overtightening, with several voting to maintain rates.
In addition to the rate decision, the Bank of England has accelerated its quantitative tightening efforts to reduce its balance sheet, providing room for potential future financial stability interventions. Over the next 12 months, it plans to reduce its gilt portfolio by £100 billion to £658 billion, adding to last year’s unwinding of £80 billion.