The Bank of England (BoE) chose to maintain interest rates at 5.25% for the sixth consecutive time last Thursday, despite inflation remaining above its 2% target at 3.2%. Alongside the interest rate decision, the BoE released its latest economic and inflation forecasts.
With a general election looming, the UK economy is under intense scrutiny, and economic strategies from major political parties are becoming a central campaign issue. Economists predict that while rates will remain at this 16-year peak now, a reduction might occur in the summer.
Interest rates were initially raised to curb the rapid increase in consumer prices and mitigate the cost of living crisis. Higher rates are intended to discourage borrowing and reduce consumer spending, helping to control price rises. However, this approach can also slow economic growth by inhibiting business investment and job creation.
The spike in prices was initially triggered by increased demand post-Covid. It was exacerbated by rising energy and food costs following geopolitical events, with inflation hitting a 40-year high of 11.1% in October 2022.
High street banks have adjusted their rates according to the BoE's base rate, affecting borrowing costs for items like mortgages and improving returns for savers. However, the hospitality sector is particularly vulnerable, with a significant number lacking sufficient cash reserves.
BoE Governor, Andrew Bailey, has suggested that "interest rates might be reduced before inflation returns to 2%", provided that there is confidence it will reach that level.
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