Interest rates expected to be held by Bank of England
UK interest rates held at 4% but Bank warns 'not out of woods' on inflation
(about 13 hours later)
Interest rates are widely expected to be held at 4% when policymakers at the Bank of England meet on Thursday.
UK interest rates have been held at 4% as the Bank of England governor warned "we're not out of the woods yet" in terms of rising inflation.
The Bank rate, which heavily influences borrowing costs and savings rates, was cut from 4.25% to 4% by the Bank's Monetary Policy Committee (MPC) at its last meeting in August.
Analysts had not expected interest rates, which influence borrowing costs and returns on savings, to be cut given that prices are rising at nearly twice the Bank's target rate.
It took the rate down to its lowest level for more than two years, but many analysts believe there will be no further cuts during the rest of this year.
The Bank said it expected inflation to return to its key target of 2%, but remains cautious on when it will again trim borrowing costs.
The decision will be revealed at 12:00 BST and comes after official data on Wednesday showed prices were rising at nearly twice the target level, driven by the higher cost of food.
Alongside the interest rate decision, the Bank also announced it would reduce the amount of government debt it holds at a slower pace, coming just weeks after turmoil in the financial markets.
The rate of inflation remained at 3.8% in August, well above the 2% target. The Bank rate is policymakers' main tool for controlling inflation.
The Bank has cut interest rates five times since August last year after the pace of price rises eased.
In theory, making borrowing more expensive means people have less money to spend, which slows prices rises. However, increasing borrowing costs can also harm the economy.
However, since April inflation has been heading higher again - fuelled in part by rising food costs.
Closely-watched vote
While it kept rates on hold this time, the Bank said that two of the nine members of its rate-setting Monetary Policy Committee (MPC) had voted to cut rates to 3.75%.
The decision to cut the Bank rate in August was taken after an unprecedented second vote by the nine members of the MPC.
The MPC will meet two more times this year to discuss rates, but the Bank said it wanted to see evidence that price pressures were easing before cutting rates again.
Andrew Bailey, governor of the Bank, said the decision to cut interest rates was "finely balanced".
"We're not out of the woods yet so any future cuts will need to be made gradually and carefully," said the Bank's governor, Andrew Bailey.
Analysts expect Thursday's vote to be more clear cut, with no change expected.
The relatively high rate of inflation means policymakers are unlikely to risk pushing that higher by cutting the Bank rate.
The Bank also announced it would reduce the rate at which it sold its stock of UK bonds, which it amassed during the financial crisis and pandemic
However, they do expect the inflation rate to start to drop soon, which leaves the possibility open of further interest rate cuts.
As Chancellor Rachel Reeves prepares to announce the Budget in November, a higher cost of servicing Britain's vast pile of debt risks reducing the amount of headroom she has against her self-imposed tax and spending rules.
The Bank rate has a big impact on the interest homeowners face when taking out a new fixed-rate mortgage.
The Bank of England bought £875bn worth of government bonds during times of crisis to support the economy.
Lenders use the Bank rate to set their own rates. As a result, the expectation of interest rate rises can push up mortgage rates while the expectation of interest rate cuts can pull mortgage rates down.
It has been reducing the amount of debt it owns by about £100bn a year. But on Thursday it said that from October onwards, it would reduce that to £70bn.
Mortgage rates have dropped very slightly since the MPC's last meeting in August, but further moves are uncertain, according to Rachel Springall, from the financial information service Moneyfacts.
Mr Bailey said the change would allow the Bank to carry on with its plans "while continuing to minimise the impact on gilt market conditions".
"Many will be waiting with bated breath for the Budget. This waiting game, alongside forecasts for inflation to remain above target, makes it less likely for the Bank of England to make further rate cuts this year," she said.
She said that savers had seen a downward trend in returns during the time when the Bank has been lowering the Bank rate.
"The average easy access [savings] rate has fallen further below 3%, so savers must act now and switch their variable rate account if it no longer pays a decent return on their hard-earned cash," she said.
Global picture
The government would be keen to see interest rates fall further, to boost growth in the UK economy.
The Resolution Foundation think-tank, which which focuses on those on low to middle incomes, said living standards needed to improve after a "lost" 20 years of growth.
But ministers will be aware of the inflationary risk that remains in the UK, especially as prices are rising slower in countries such as the US, Germany, and France.
Thursday's MPC decision will come after the US central bank chose to cut interest rates on Wednesday to a range of 4% to 4.25% for the first time since December.
Last Thursday, the European Central Bank chose to hold its interest its at 2%.
