Third time lucky: Bank of England set to hold interest rates following inflation warning

The Bank of England have announced interest rates will remain at 5.25% for the third time as Britain continues to battle inflation levels.  

Yesterday the Bank of England (BofE) announced they would be keeping interest rates at 5.25% – the highest level since the 2008 financial crisis – as Britain is facing a tougher job to crush persistently high inflation than other advanced nations.

The news comes as the ONS have recently unveiled that Britain’s economy shrank to 0.3% in October as higher interest rates squeezed household budgets. In addition, the news has set itself apart from the US Federal Reserve, which signalled on Wednesday that it is expected to cut interest rates three times next year.  

Against this backdrop, the Bank of England have also said rates would need to remain at high levels for ‘sufficiently long’ to return inflation back to its 2% target that was set by central government.

‘The Bank of England has once again passed on the opportunity to lower the current 5.25% bank rate. This indicates that the Monetary Policy Committee still believes that inflation is delicately poised, and a premature lowering of interest rates could unwind some hard-fought progress,’ John Glencross, CEO and co-founder of Calculus said. ‘UK inflation figures remain worse than the US and Euro-area and the narrative from the BofE indicates interest rates will remain higher for an extended period of time.’

John added: ‘Adapting to a period of prolonged higher interest rates is key for investors. For small early-stage businesses, accessible through the EIS and VCT investment schemes, delivering on business plans will have a far greater impact on their valuation than the change in the interest rate environment.’

In November, the rates of inflation were reported to have dropped to 4.6% in October which was down from 6.7% the month before. However, the figures for inflation rates in November are due to be announced next week and Andrew Bailey, the governor of the Bank of England, has claimed that due to the cost-of-living crisis we can never be too careful when it comes to financial security.

Andrew Bailey said: ‘We have seen an unwinding of many of the shocks, the big shocks, that we had last year, particularly related to the war in Ukraine and so on.

‘But there is this persistent element to [inflation] which we have got to take out.

‘My view at the moment is it’s really too early to start speculating about cutting interest rates. I don’t think we can say definitively that interest rates have peaked. I hope that we are top of the cycle.’  

Echoing a similar tone, Douglas Grant, CEO at Manx Financial Group PLC, has said that leaving interest rates where they are is the best decision that could be made at this time.

‘Today’s decision to maintain the current interest rates once again provides encouragement to both businesses and consumers. As the year concludes and with yesterday’s drab GDP economic data, SMEs should use this period to assess and adapt their lending structures to ensure resilience in the face of potential economic challenges in 2024,’ Douglas said. ‘Despite recent economic data offering some reassuring signs, research conducted by Manx reveals a significant shift in the financial landscape for SMEs. In contrast to last year, when only a quarter of them faced obstacles, the current situation has led two in five SMEs to either pause or slow down certain operations due to difficulties in obtaining external financing. Furthermore, the survey highlights that 15% of SMEs in need of external funding or capital couldn’t access the necessary funds, creating a significant hurdle for SME growth.’

Douglas added: ‘Despite positive steps like recent short-term loan schemes, we strongly advocate for the continuation and expansion of government-led initiatives aimed at strengthening SME resilience and fostering growth. Our proposition revolves around the establishment of a permanent government-backed loan scheme, tailor-made for various sectors, and involving both traditional and non-traditional lenders.

‘As concerns about the economy’s future grow, maintaining and prioritising the implementation of a permanent scheme is essential for policymakers. It has the potential to play a pivotal role in sustaining economic recovery and preserving the survival of numerous companies.’

Image: Alicja Ziajowska

More on the Bank of England:

Bank of England’s path of pain: Interest rates expected to remain high

Economic danger zone: Bank of England hikes interest rates following inflation failure