On 19th September 2024, the Bank of England (BoE) made the decision to maintain its base interest rate at 5.00%. The vote came at 8 to remain at 5.00% and 1 voting to drop the rate to 4.75%. The decision to remain steady was to control inflation currently at 2.20%.
Inflation: The Key Driver Behind Interest Rate Policy
Inflation has been the primary factor influencing the BoE’s monetary policy over the past two years. Although inflation has receded from its peak of over 10% in late 2022, and latest figures at 2.20%, Andrew Bailey, Bank of England Governor quoted ‘it’s vital inflation remains low’ and needing to avoid cutting interest rates ‘too much or too fast’ as quoted by Andrew Bailey, Bank of England Governor.
In such an environment of high inflation or a goal to control inflation, central banks typically raise interest rates to cool demand and bring inflation back to target levels. However, raising rates also risks slowing down the economy too much, which could lead to a recession. This delicate balancing act was at the heart of the BoE’s decision to keep the base rate unchanged in September.
Why the Bank Held Rates at 5.00%
There are several reasons the BoE chose to keep the base rate unchanged at 5.00%.
- Inflation Near Target: With inflation finally approaching the BoE’s target of 2%, the central bank may feel its aggressive rate hikes have been successful in stabilising prices. Holding rates allows the bank to assess how these changes will continue to affect inflation and the broader economy.
- Global Uncertainty: The BoE is also mindful of external factors that could impact the UK economy, such as geopolitical tensions, changes in global energy markets, or further disruptions to supply chains. Holding rates at their current level allows the bank to respond quickly if new inflationary pressures emerge.
The Impact on Borrowers and Savers
The decision to hold the base rate at 5.00% has important implications for both borrowers and savers:
- For Borrowers: With rates remaining steady, there will be no immediate increase in borrowing costs for mortgages, loans, or credit cards. However, with interest rates already at a relatively high level, many households will continue to feel the strain of elevated monthly repayments, especially on variable-rate mortgages although in the last few weeks we have seen rate reductions due to a competitive mortgage lending market where lenders are fighting for their market share.
- For Savers: Savers will continue to benefit from higher interest rates on their savings accounts and ISAs. The higher base rate has encouraged banks to offer better returns on savings, helping people preserve the value of their money amid the still-recent inflationary environment.
