Bank of England goes it alone as rates left on hold: Bailey hints at November hike as inflation pressures build

The Bank of England yesterday stood its ground as the last major central bank to resist interest rate increases despite growing inflation pressures.

Governor Andrew Bailey signalled a hike could be on the way but fought shy of taking action for now – even after counterparts in the US and Europe did so.

It came as the Bank plans to pause its sales of UK bonds in a move that surprised markets and lowered Government borrowing costs.

Rising oil and gas prices, due to the Iran war, have intensified global price pressures and caused bond market jitters.

The European Central Bank has hiked interest rates twice this year to quell inflation anxiety. 

And even in the US, where the Federal Reserve is under intense pressure from President Donald Trump to cut rates, there has been a quarter-point interest rate rise. 

In Threadneedle Street, however, the vote was split at six to three in favour of leaving rates at 3.75 per cent – though the minority backing a hike increased and included chief economist Huw Pill.

That is despite the Bank predicting energy prices are set to surge 24 per cent in January, helping lift inflation past 4 per cent, more than twice its 2 per cent target. 

Pill said an increase would send a ‘clear signal’ of a commitment to hitting the target ‘amid the fog of geopolitical conflict and data noise’.

But Bailey said there was ‘very limited evidence’ of the energy price shock spreading through the economy causing ‘second-round’ inflation effects.

But he acknowledged that if the Middle East conflict persists, as seems likely, rates would have to go up.

Suren Thiru, chief economist at the Institute of Chartered Accountants in England and Wales, said the Bank chose ‘patience over panic’ by balancing inflation risks with ‘little evidence that it is fuelling more persistent, economy-wide price pressures’.

Other experts said the Bank was signalling a probable hike at the next meeting of its rate-setting Monetary Policy Committee in November.

Thomas Pugh, chief economist at accounting firm RSM, said the Bank was likely to be ‘uncomfortable leaving rates on hold when inflation rises above that crucial 4 per cent threshold’.

He added: ‘The likelihood of a synchronised global hiking cycle now looks more likely than at any time since Russia’s invasion of Ukraine.’

Meanwhile, the Bank has started overhauling the way it unwinds quantitative easing – the programme where it bought £895billion of bonds to boost the economy during the financial crisis in 2009 and the pandemic.

It has been reducing these holdings by selling the bonds. But that has weighed on bond prices, pushing up their yields – a proxy for Government borrowing costs. Recently, yields on 30-year UK bonds, known as gilts, reached their highest since 1998.

By pausing sales of gilts for six months and halting sales of longer-date gilts entirely, the Bank has reduced that pressure – delivering a boost for Chancellor John Healey.

The move sent yields on 30-year gilts falling from 5.86 per cent to 5.74 per cent. Ten-year gilt yields dropped from 5.3 per cent to 5.22 per cent.