The Bank of England has downgraded their forecast for economic growth and inflation may stay higher for longer and interest rates have been held at 5.25%.
The Bank of England governor warned that it is “much too early” to think about reducing interest rates as the Monetary Policy Committee (MPC) voted by a six-three majority to keep the base rate the same, but three members wanted to raise the rate to 5.5%.
Andrew Bailey said, “We’ve held rates unchanged this month, but we’ll be watching closely to see if further rate increases are needed.”
Victor Trokoudes, founder and CEO at smart money app Plum said, “As expected, the Bank of England has decided to not change interest rates for the second month in a row. The decision to pause appears to be less contentious this time, with a 6:3 majority in favour of no rise vs 5:4 in September’s meeting. And it follows on from similarly cautious decisions by the Fed and ECB in recent weeks.
“Even though the base rate hasn’t gone up further today, that doesn’t mean the pain is over. The base rate remains high at 5.25% and the BoE has made clear that it expects rates to remain high into the latter half of next year, save for a sudden plunge into recession which would lead to the BoE likely cutting rates quicker than they’d like.
“As things stand currently, inflation appears to be more broadly embedded in the UK compared to other major economies, with services inflation rising back to 6.9% last month, so it’s little surprise that the base rate is set to stay where it is for longer and for the BoE to not rule out an additional rise.
“It is estimated that only a fraction of the rises have truly worked their way through the economy, so you can understand why the BoE is choosing to not increase the base rate further, especially with signs of slow down in the economy already.
“For example, their recent Money and Credit report showed that bank lending is already falling and today’s minutes make clear GDP growth is set to be weaker than projected previously.
“And with oil prices rising and more households coming to the end of cheap fixed mortgage rates, the cost of living challenges are becoming more intense even without a further interest rate hike. Issues with the reliability of official labour market data added to the BoE’s caution as well.
“That said, it will be reassuring to know that the rate trajectory is no longer on a steep incline. Anyone looking to secure a mortgage in the next year or two will be more hopeful that the peak in rates is already in, and those who opted for a tracker or variable rate will be breathing a sigh of relief.
“Even with no further rises, homeowners will have to pay much higher rates than we have all grown used to in the past decade or two. For example, a 2 year fix was 5.94% last month on average, compared with 4.17% last year. In real terms, for a mortgage of £225,000 with a term of 25 years that would mean monthly repayments going from £1,370.03 to £1,633.63 a month.
“While you can expect to be paying higher rates on your mortgage or other type of loan with a bank, it’s a different story when it comes to savings. Most major banks are still only offering easy access rates that are less than half the BoE rate. It’s no surprise that many savers are growing tired of the restrictive, low-rate products offered by the high street names.
“The amount of outflows from banks and building societies increased last month, suggesting people are recognising that there are different options out there. For example, money market funds are growing in popularity as people opt for products that more closely track the base rate in a low risk way.”