At its June meeting, the Bank of England held, on June 20, interest rates at 5.25% for the seventh time. Thus, the BOE retained them at their highest level for 16 years.
The pause follows a 14 successive hike as the Bank of England tried to cut inflation.
Prices in the UK rose by 2% in the year to May 2024, down from 2.3% the month before and the lowest rate in almost three years.
Thus, inflation has finally hit the Bank of England’s 2% target. Still, the Bank of England decided to keep rates on hold at 5.25%.
What is the Bank of England?
The Bank of England is the UK’s central Bank. It is independent of government but operates closely with the HMS Treasury.
It describes its critical job as ensuring the UK has secure banknotes, stable prices, a safe banking sector and a resilient financial system.
Why Does the Bank Change Interest Rates?
The Bank has a target to keep inflation at 2%.
The headline Consumer Prices Index (CPI) inflation rate – which follows the price of a typical basket of goods – has fallen from 11.1% in October 2022 to 2% in May 2024.
Therefore, this was the first time inflation has hit the Bank of England’s target in almost three years.
The recent surge in inflation was originally due to rising energy and food costs, primarily caused by the war in Ukraine. However, other factors, such as wage increases in the UK, also helped keep prices high.
The Bank of England’s standard response to rising inflation is to increase the UK’s official interest rate. From November 2021, the Bank increased interest rates on 14 successive occasions to 5.25%, the highest level since February 2008.
The Bank has since held rates at that level seven times, most recently in June 2024.
How Does Changing Interest Rates Affect Inflation?
Higher interest rates mean people have to pay more for their mortgages. Thus, consumers will have less money to spend on other things.
Also, it makes it harder for businesses to borrow money and expand.
Alternatively, if the Bank cuts interest rates, borrowing becomes cheaper, and individuals have more money to spend on other things.
This can encourage companies and people to borrow and spend more, boosting the UK economy.
How Does the Bank of England Change Interest Rates?
The Bank’s Monetary Policy Committee (MPC) meets eight times yearly to set rates.
Its nine members vote on whether to hike, reduce or hold interest rates.
Minutes of the meeting at which the decision was taken are also published for transparency.
Also, it shows how the different members voted, giving clues about future decisions.
The Bank also publishes a Monetary Policy Report four times a year, which sets out the economic analysis and inflation forecasts that the MPC uses to make its interest rate decisions.
What Else Does the Bank Do?
- Buys and sells government bonds. From the 2009 financial crisis until 2021, the Bank bought £875bn of government bonds through quantitative easing. This was designed to reduce overall government borrowing costs, lower interest rates, and stimulate spending in the economy.
- Produces banknotes and oversees credit and debit card payments.
- Regulates banks and building societies
- Monitors risks in the UK financial system and acts to reduce them, like lending to banks if needed. It shares responsibility for this with the Treasury and financial regulator, the Financial Conduct Authority.
- Stores the UK’s gold reserves – 400,000 bars worth more than £200bn – and those of other central banks.