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The Bank of England kept rates steady at 5.25 per cent on Thursday as governor Andrew Bailey warned there was “still some way to go” before inflation hit its target.
The BoE’s Monetary Policy Committee said interest rates would need to be kept high for an “extended period of time” and left open the option of further rate rises if necessary.
“There is still some way to go. We’ll continue to watch the data closely, and take the decisions necessary to get inflation all the way back to 2 per cent,” Bailey said.
The MPC voted six to three to keep the central bank’s key rate at its highest level in 15 years.
The BoE’s guidance contrasted sharply with the US Federal Reserve, which triggered a market rally overnight by opening the door to interest rate cuts in the new year.
Sterling rose 0.7 per cent against the dollar to $1.2702 on Thursday, consolidating gains made earlier in the day on the back of the Fed’s dovish statement.
UK government bond yields, which move inversely to prices, partially retraced earlier declines with the rate-sensitive two-year yield rising to 4.29 per cent having fallen to 4.24 per cent ahead of the announcement. Two-year yields remained down 0.08 percentage points on the day.
BoE staff expect UK gross domestic product to be flat in the fourth quarter, compared with 0.1 per cent growth predicted in November, with household spending weaker than previously expected.
But the MPC repeated warnings that “further tightening in monetary policy would be required if there were evidence of more persistent inflationary pressures”.
The decision over whether to keep the BoE’s key rate unchanged or to lift it was again “finely balanced”, it added.
“We’ve come a long way this year, and successive rate increases have helped bring inflation down from over 10 per cent in January to 4.6 per cent in October,” Bailey said.
Three MPC members — Megan Greene, Jonathan Haskel and Catherine Mann — again voted for an extra quarter-point rate increase, as they noted signs that financial conditions had “eased” since the last meeting.
The rest of the committee opted to keep rates on hold, although one dove warned of building risks of “overtightening”.
The BoE noted consumer price inflation had fallen sharply from 6.7 per cent in September to 4.6 per cent in October, and said there had been “further evidence of some loosening” in the labour market.
But the BoE warned that core inflation — which strips out food and energy — remained higher at 5.7 per cent than in the US and euro area, and that services price inflation is also more elevated, as is wage growth.
Though there had been some easing in services inflation — an indicator the BoE watches closely as a sign of underlying price pressures — policymakers played down the importance of the fall.
The BoE said the declines had been driven by components such as non-private rents and airfares that are “not typically reliable indicators of trends in inflationary persistence”.
Excluding them, services inflation had held at “continued high rates” in line with the past six months, the BoE said.
The MPC meeting came after chancellor Jeremy Hunt cut personal and business taxes in his Autumn Statement last month.
The BoE signalled Hunt’s decisions had not made a big difference to its inflation outlook. The central bank said the measures had lifted potential supply as well as the level of GDP, meaning the implications for inflationary pressures “were likely to be smaller”.
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