Interest rate held at 5.25%

The Bank of England has left interest rates unchanged at 5.25% for the second month running, with no likelihood of a rate cut until mid 2024 at the earliest

Sara White, Editor, Accountancy Daily

The members of the monetary policy committee (MPC) voted six to three in favour of keeping the base rate at 5.25%, in line with the same hold decision by the US Federal Reserve and European Central Bank earlier this week.

More worryingly, the Bank indicated that it expects interest rates to remain at 5.25% for at least seven months with no cut predicted until Q3 2024. It added that there would only be gradual cuts until the end of 2026, when rates are expected to be 4.25%. ‘Further tightening in monetary policy would be required if there were evidence of more persistent inflationary pressures,’ it warned.

The latest projections ‘indicate that monetary policy is likely to need to be restrictive for an extended period of time’, with interest rates running at current rates well into 2024.

On inflation, it expects the rate to start to fall sharply to 4.75% from current 6.7% by the end of the year, and then down to 3.75% in spring 2024, due to lower energy, food prices and services inflation. However, it warned that ‘there are also upside risks to inflation from energy prices given events in the Middle East’. Despite the policy of hiking interest rates, the Bank only expects inflation to return to 2% in two years’ time.

It also confirmed that flat GDP growth in Q3 was likely to continue with only 0.1% growth projected in Q4, weaker than expected, which includes the run-up to Christmas.

Glenn Collins, head of technical and strategic engagement at ACCA, said: ‘The previous month’s hold of interest rates at 5.25% was a welcome and necessary breather after 14 consecutive rises. However, it now appears that the UK economy is stuck holding its breath, awaiting some kind of economic sign to help kick start the reduction in interest rates.

‘This holding pattern or a ‘wait and see’ attitude is something ACCA has seen translate to the feedback from accountants about the businesses they support. A sense of “perma-crisis” has left businesses hesitant to invest, delaying decisions until a clearer picture of the prospects for the UK economy emerges. It seems inevitable that further action, in addition to the Bank’s single monetary policy lever, will be required. Undoubtedly, the Chancellor has an important Autumn Budget statement ahead.’

The long-term impact of higher interest rates is a concern.

Adam Zoucha, MD of FloQast, said: ‘Interest rates holding steady at 5.25% will come as a relief, as a further increase would have been more difficult for organisations to manage.

However, businesses still need to plan for how to cope with high interest rates for the long term, as all the indicators point to rates holding through to September 2024.

‘This hold on fiscal tightening continues to put us on a similar footing to the height of the financial crisis, and has increased business risk and the number of liquidations. Additionally, insolvency levels this year are now on track to meet the levels of 2009.

‘As ever, organisations will need to be fiscally shipshape. Accurate finances and efficient data will be the bedrock of business resilience and the springboard for recovery once confidence returns.’