By William Schomberg, Andy Bruce and Suban Abdulla
LONDON (Reuters) -The Bank of England halted its long run of interest rate increases on Thursday as the British economy slowed, but said it was not taking a recent fall in inflation for granted.
A day after a surprise slowing in Britain’s fast pace of price growth, the BoE’s Monetary Policy Committee voted by a narrow margin of 5-4 to keep Bank Rate at 5.25%.
Four members – Jon Cunliffe, Megan Greene, Jonathan Haskel and Catherine Mann – voted to raise rates to 5.5%.
It was the first time since December 2021 that the BoE did not increase borrowing costs.
Sterling fell by half a cent against the U.S. dollar to its lowest since late March and it also weakened against the euro.
Investors put only a 10% chance on Bank Rate going any higher in coming months.
Britain’s economy has been hampered by the highest inflation rate in the Group of Seven even as growth remains fragile, raising the risk for the BoE of pushing it into a recession with its 14 back-to-back rate hikes to date.
“There are increasing signs of some impact of tighter monetary policy on the labour market and on momentum in the real economy more generally,” the MPC said in a statement.
It cut its forecast for economic growth in the July-September period to just 0.1% from August’s forecast of 0.4% and noted clear signs of weakness in the housing market.
Growth for the rest of the year was likely to be weaker than previous forecasts, the BoE said.
Record growth in workers’ pay, which has been a big concern for the central bank, was not backed up by other measures of the labour market, it noted, suggesting the BoE’s policymakers expected it to slow down soon.
“CPI inflation is expected to fall significantly further in the near term, reflecting lower annual energy inflation, despite the renewed upward pressure from oil prices,” the BoE said.
But it said services inflation was expected to remain elevated.
READY TO RAISE IF NEEDED
The BoE’s decision to pause its rate hikes came a day after the U.S. Federal Reserve also opted to keep borrowing costs on hold. Last week, the European Central Bank raised rates but suggested its move might be the last for now.
The MPC reiterated its message that it was prepared to raise borrowing costs again if needed.
“Further tightening in monetary policy would be required if there were evidence of more persistent inflationary pressures,” the statement said, and it repeated the guidance that monetary policy would be “sufficiently restrictive for sufficiently long” to get inflation back to its 2% target from 6.7% in August.
Governor Andrew Bailey and other MPC members have recently suggested the BoE was close to pausing its run of interest rate increases but they have also stressed that borrowing costs are likely to remain high to ensure inflation pressures are squeezed out of the economy.
“Despite the tightening cycle reaching its peak, monetary policy will remain restrictive for some time,” Yael Selfin, chief economist at KPMG UK, said, predicting a first cut in rates could come only from November 2024.
In a separate statement on Thursday, Bailey welcomed the recent fall in inflation and BoE forecasts that it would continue to ease. “But there’s no room for complacency,” he said. “We need to be sure inflation returns to normal and we will continue to take the decisions necessary to do just that.”
The MPC agreed to speed up the pace of its programme to shrink the massive stockpile of government bonds that the central bank acquired over the past decade and a half as it sought to steer the economy through the global financial crisis and the coronavirus pandemic.
As investors had widely expected, the stockpile will be reduced by 100 billion pounds over the next 12 months – by a combination of sales and allowing bonds to mature – to a total of 658 billion pounds, the BoE said, faster than the 80 billion pounds reduction over the past year.
(Writing by William Schomberg; Editing by Catherine Evans)
