LONDON (AP) — The U.K.’s central bank has kept interest rates on hold as inflation moves further above its target rate, even though the British economy is flatlining at best.
The Bank of England’s nine-member Monetary Policy Committee kept its main interest rate unchanged at 4.75% Thursday with new data showing inflation rising to 2.6%, further above the bank's 2% target.
In response the rate-setting panel, which last cut its key rate in November, is taking a cautious stance because lower borrowing costs could potentially stoke inflation even further.
That’s a disappointment for many struggling sectors in the U.K. economy that would be helped by cheaper credit in an environment of paltry growth. The British economy has now contracted for two months in a row.
“Persistent price pressures will prevent the Bank of England from responding to flat output and falling employment by cutting interest rates,” said Andrew Wishart, an economist at Berenberg Bank.
Few economists think interest rates will drop dramatically in 2025 either. It's a similar picture in the U.S., where the Federal Reserve reined in expectations Wednesday of reductions next year after its latest rate cut.
Critics argue that the new Labour government’s first budget in October has both elevated inflation pressures while also damping down on growth. A big increase in business taxes may see firms try to offset the additional costs by raising prices or cutting down on hiring. The government argues that it needed to raise taxes to shore up public finances and inject money into cash-starved public services.
Still, inflation in the U.K. and across the world is far lower than it was a couple of years ago, partly because central banks dramatically increased borrowing costs from near zero during the coronavirus pandemic when prices started to shoot up, first as a result of supply chain issues and then because of Russia’s full-scale invasion of Ukraine which pushed up energy costs.
As inflation rates have fallen from multidecade highs, the central banks have started cutting interest rates, though few, if any, economists think that rates will fall back to the super-low levels that persisted in the years after the global financial crisis of 2008-2009.
