The Bank of England has surprised markets by holding interest rates in the United Kingdom steady.
Economists had widely expected the British central bank to raise interest rates at its latest policy meeting yesterday (November 4). However, the Bank of England said it wants to see what happens to unemployment after the British government ends a program that had worker pay during the coronavirus pandemic before moving on its key lending rate.
The decision to keep the bank's main interest rate at 0.1% was a big surprise, given the sharp rise in consumer prices in recent months as a result of high energy costs, labour shortages and other factors as the global economy recovers from the pandemic.
"It was a very close call," Bank of England Governor Andrew Bailey said at a news briefing. "We are in a situation where the calls are close, they're quite hard, but that's just a reflection of the position we are in."
Financial markets had been increasingly pricing a rate rise to 0.25% over recent days, prompting some mortgage lenders to withdraw some of their cheapest loans. Market reaction to the decision was instant, with the British pound selling off sharply against other currencies. Against the dollar, it was down 1%, at $1.355.
The central bank's decision kept it in line with other leading economies, with the European Central Bank and U.S. Federal Reserve recently leaving interest rates unchanged. The Fed, however, announced this week that it would start winding down a stimulus program it put in place during the pandemic to keep a lid on inflation.
The vote by the Bank of England's rate-setting Monetary Policy Committee was 7-2 in favor of keeping the rate unchanged. The two members who voted for a hike said it was necessary because of strong domestic and global cost pressures, according to minutes accompanying the decision.
Although the bank opted against hiking rates and said many of the factors behind the recent spike in consumer prices are "transitory," such as higher oil and gas prices, it made clear that it intends to lift borrowing costs in the "coming months" to help bring inflation back toward its annual target of 2%.
Economic forecasts accompanying the latest decision showed the bank expects inflation to rise from 3.1% to 4.5% in November, then to about 5% in April, which would be the highest level in a decade. Inflation would then undershoot the 2% target in three years if interest rates rose to around 1% by the end of 2022, as markets are expecting.
The bank also slashed its growth forecasts for the British economy as a result of supply chain problems and Britain's departure from the European Union. The central bank now expects the British economy to return to its pre-pandemic level by the first quarter of 2022 after previously predicting a recovery by year's end.
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