In the end, the decision was pretty close: with a majority of just one vote, the responsible committee at the Bank of England decided to maintain the key interest rate of 5.25 percent. Five members of the Monetary Policy Committee On Thursday, they voted in favor of a break in interest rates, while four voted in favor of a further increase. The main reason for the break is the unexpected drop in inflation in August. At 6.7 percent, this is still higher in Great Britain than in the other G-7 countries, but the trend seems to be quite clear: inflation will probably continue to fall in the coming months.
With the interest rate pause, the Bank of England is now following the example of the US Federal Reserve. The Fed only maintained its key interest rate, the so-called overnight target range, at 5.25 to 5.50 percent on Wednesday. The Swiss National Bank also paused interest rates on Thursday. The key interest rate in Switzerland is currently just 1.75 percent, which is significantly lower than in other Western countries. However, Switzerland also records a comparatively very low inflation rate of just 1.6 percent.
The head of the Bank of England, Andrew Bailey, can only dream of this. Even before the decision, he had already said that interest rates had gradually reached their peak. According to the head of the central bank, the inflation rate is expected to continue to fall. On Thursday, Bailey said that despite this assumption, there was “no reason for complacency.” “We need to ensure that inflation returns to normal and we will continue to make the necessary decisions to achieve exactly that,” he said. However, it will probably take longer until the central bank’s target of two percent inflation is reached. In order to combat inflation, the Bank of England had raised the key interest rate even more than the European Central Bank (ECB) for over a year. Only now there is a break at 5.25 percent.
However, it is uncertain whether the inflation rate will continue to decline as hoped. Just earlier this week, the Organization for Economic Co-operation and Development (OECD) adjusted its inflation forecast for the United Kingdom. According to this, prices in Great Britain will rise by an annual average of 7.2 percent – in June the OECD had assumed 6.9 percent. If that happens, inflation in Great Britain this year would be higher than in any other major industrial country.
For British Prime Minister Rishi Sunak, the development of inflation is crucial. He tied his political fate to it when he promised in January to halve the then inflation rate to 5.4 percent by the end of the year. This promise is part of Sunak’s election campaign. In the United Kingdom, a new House of Commons must be elected by January 2025 at the latest. However, the Prime Minister is unlikely to wait that long. In Westminster it is assumed that the election will take place in 2024. Sunak’s Tories are currently 15 to 20 percent behind Labour, the largest opposition party, in the polls.