Bank of England Maintains Mortgage Rates at 5% Despite Federal Reserve Cut

The Bank of England kept its main interest rate, which directly impacts mortgage rates, unchanged at 5% on Thursday, despite the U.S. Federal Reserve's recent half-percentage point cut to approximately 4.8%.

• The decision was widely expected due to ongoing concerns about high inflation levels, particularly in the crucial services sector.
• Eight out of nine members of the Bank's monetary policy committee voted to keep rates unchanged, while one backed a quarter-point reduction.
• The Bank of England last month cut interest rates for the first time since the pandemic, but Governor Andrew Bailey emphasized the need to be cautious about cutting rates too quickly to maintain low inflation.

Inflation Concerns and Central Bank Rate Decisions

Central banks around the world raised interest rates aggressively from near-zero levels during the COVID-19 pandemic to combat soaring inflation caused by supply chain issues and the Russia-Ukraine war's impact on energy costs.

• As inflation rates have fallen from multi-decade highs recently, some central banks have started cutting interest rates, including the Federal Reserve's recent move.
• However, the Bank of England is closely monitoring inflation in the UK, which held steady at 2.2% in August, above its target.
• The bank is expected to reduce borrowing costs again at its next meeting in November, after considering the government's upcoming budget on October 30.

Impact on Mortgage Rates and Borrowing Costs

While the Bank of England's decision to maintain mortgage rates at 5% may be seen as bad news for borrowers in the short term, relief is expected in the coming months as most economists predict a gradual reduction in interest rates.

• Mortgage rates and personal loan costs are likely to decrease as the bank's main rate is expected to drop to around 3.5% by the end of 2025.
• The new Labour government's budget, expected on October 30, could influence the bank's rate decisions, as it aims to address a £22 billion hole in public finances.
• Tax increases and spending cuts proposed in the budget may weigh on the UK economy's near-term outlook and put downward pressure on inflation, potentially paving the way for more rapid rate cuts.

Global Economic Factors and Monetary Policy Decisions

The Bank of England's rate decision comes amid broader global economic trends and central bank actions aimed at managing inflation and supporting economic growth.

• Central banks worldwide have been grappling with the delicate balance of controlling inflation while avoiding excessive rate hikes that could stifle economic recovery.
• The Federal Reserve's rate cut signals a potential shift towards a more accommodative monetary policy stance as inflation rates moderate.
• However, the Bank of England's cautious approach reflects the unique economic conditions and inflation dynamics in the UK, necessitating a more measured approach to rate adjustments.