Businesses ‘welcome’ BoE’s decision to leave interest rates unchanged

UK businesses will welcome the Bank of England’s (BoE) decision to hold interest rates at their current level, according to Gemma Gathercole, strategic engagement lead (England) at ACCA UK. 

However, experts believe further monetary tightening will likely be on the cards as the Monetary Policy Group (MPC) pauses its series of hikes to wait for additional economic data.  

Today (September 21), the BoE’s MPC announced interest rates would remain unchanged at 5.25%. The MPC voted by a majority of 5–4 to maintain the rate, while four members preferred to increase the bank rate by 0.25 percentage points, to 5.5%.  

The choice marks the conclusion of a string of 14 successive increases implemented since late 2021 to mitigate inflation. 

 “Our members tell us that despite the recent reduction in the rate of inflation, they are still seeing negative impacts on businesses and a hold on investment, which puts the brakes on potential UK growth,” Gathercole said. 

 “The Government needs to work with the Bank of England to do more to encourage businesses to invest and grow.”   

The Office for National Statistics (ONS) disclosed that the UK’s inflation rate dropped slightly in August from 6.8% to 6.7%.  

According to Jonathan Ashworth, the chief economist at ACCA, the BoE’s decision was a “close call” due to the unforeseen inflation data. 

“It is still a bit of a surprise that the Monetary Policy Committee sat on their hands. The committee was split, with five members voting to keep rates on hold, and four opting for a quarter point hike,” he stated.  

The BoE’s decision could be a ‘pause’   

Prior to the release of the August consumer price index (CPI), the market had factored in an 80% probability that the central bank would increase interest rates by 25 basis points to 5.5%.  

However, following the inflation update, that probability had dropped to just below 50%.   

“Today’s decision could be framed as a pause,” says Martin Beck, chief economic advisor to the EY ITEM Club. This would allow the MPC to wait for new data to get a clearer picture of the economic and inflation situation before the next meeting in November, he adds.  

At this stage the BoE will also be publishing its Inflation Report and a more comprehensive snapshot of the economy.  

ACCA’s Ashworth also believes there is still a potential need for additional monetary tightening in the future, signifying an ongoing risk.   

Interest rates were already at a 15-year high, with the BoE suggesting high rates were beginning to “hurt” the UK economy.   

While numerous experts had anticipated a further increase in rates, the BoE’s MPC’s choice to keep them unchanged has been received well by the UK chancellor, Jeremy Hunt.  

Hunt said the UK is beginning to see the “tide turn against high inflation”.   

 “Now is the time to see the job through. We are on track to halve inflation this year and sticking to our plan is the only way to bring interest and mortgage rates down,” he said.