image source, Getty Images
- Author, Michael Race
- Role, Business reporter, BBC News
Interest rates are expected to be held again next month rather than cut for the first time in more than four years, the Bank of England’s rate-setting body said.
Jonathan Haskel, a member of the Bank’s Monetary Policy Committee (MPC), which sets the UK’s main interest rate, said he would “prefer to keep rates” at 5.25% until there is more certainty that inflationary pressures have “sustainably subsided”.
Interest rates have been held at a 16-year high in an effort to slow rising consumer prices, but higher rates have pushed up the cost of borrowing, including mortgages.
The bank had earlier hinted that rates could be cut in August after official data showed inflation – which measures the rate of price growth – had slowed to 2%, in line with its target.
This in turn has led to some lenders slightly reducing mortgage rates.
Financial markets are currently pricing in a roughly 60% chance that rates will be cut next month for the first time since 2020.
But Mr Haskel, who voted to keep rates in place in June, said he believed his fellow politicians should remain cautious, citing concerns about the UK labor market and worker shortages.
He said that while there were “significantly encouraging signs” of inflation easing, the rate would in fact remain above 2% “for some time”.
“The labor market remains tight and I fear that it is still disrupted,” he wrote in a speech to be delivered later on Monday.
“I would prefer to keep rates on hold until there is more certainty that underlying inflationary pressures will sustainably subside.”
Some mortgage lenders are counting on the benchmark rate to fall as part of wider considerations when setting the interest rates they charge on new fixed deals.
They also want to ensure that they are competitive but not overwhelmed with mortgage applications that they then struggle to process.
The Nationwide and Virgin have become the latest to cut rates, following other lenders in recent weeks. The former said it would cut rates by up to 0.3 percentage points on Tuesday.
The UK prime rate also informs the rates that High Street banks offer on savings accounts.
The average two-year fixed mortgage on Monday was 5.93%, while the five-year was 5.51%, according to financial information company Moneyfacts.
The average savings rate for easy access was 3.11%.
Higher borrowing costs have added to financial pressures on household budgets in recent years, which have been stretched by higher utility and food bills.
Economic effect
The Bank of England is independent of the government and its main role is to keep inflation stable at 2%.
In response to high inflation, the bank has raised and subsequently kept interest rates high in recent years. The bank also predicts that inflation could rise slightly again in the coming months.
The theory behind rising rates is that they will slow inflation, but they can also drag on economic growth as businesses may delay investment or hiring, which could mean fewer jobs are created.
The UK still has a lower percentage of people of working age in employment than before the Covid pandemic.
Inflation can be affected by a shortage of workers because it can lead to employers having to raise wages to attract and retain workers, which in turn can lead to an increase in the price of goods as businesses raise them to cover costs.
Mr Haskel is an external member of MPC Bank and also Professor of Economics at Imperial College Business School.
“The play-through of these shocks through the economy and a continued tight and disrupted labor market mean that inflation will remain above target for some time to come,” Haskel wrote in his speech.
His tenure at the MPC is set to end on August 31.