Bank of England holds interest rate at 4% but warns of inflation risks

The Bank of England (BoE) has retained the country’s interest rate at 4 percent.

On Thursday, the bank’s monetary policy committee (MPC) voted by a majority of seven to two to maintain the rate at 4 percent.

Two members voted to reduce the interest rate by 0.25 percentage points to 3.75 percent.

The bank said it expects inflation to return to its key target of 2 percent, but remains cautious on when it will trim borrowing costs again.

“There has been substantial disinflation over the past two and a half years, following previous external shocks, supported by the restrictive stance of monetary policy,” the BoE said.

“That progress has allowed for reductions in Bank Rate over the past year. The Committee remains focused on squeezing out any existing or emerging persistent inflationary pressures, to return inflation sustainably to its 2% target in the medium term.

“The Committee remains alert to the risk that this temporary increase in inflation could put additional upward pressure on the wage and price-setting process.

“Pay growth remains elevated, but has fallen and is expected to slow significantly over the rest of the year. Services consumer price inflation has been broadly flat over recent months.

“Upside risks around medium-term inflationary pressures remain prominent in the Committee’s assessment of the outlook.

“Underlying UK GDP growth has remained subdued, consistent with a continued, gradual loosening in the labour market, as well as a margin of slack in the economy. Downside domestic and geopolitical risks around economic activity remain.”

Alongside the interest rate decision, the bank also announced it would reduce the amount of government debt it holds at a slower pace, coming just weeks after turmoil in the financial markets.

The regulator said it would reduce the rate at which it sells its stock of UK bonds.

This, the BoE said, are mainly government debts amassed during difficult periods, such as the global financial crisis of 2008 t0 2009 and the COVID-19 pandemic, as a way of stimulating the economy.

Speaking on the MPC’s decision, Andrew Bailey, the BoE governor, said the country is “not out of the woods yet, so any future cuts will need to be made gradually and carefully”.

US CUTS INTEREST RATE BY 0.25%

Unlike the UK, the United States Federal Reserve, on September 17, cut its key interest rate by 0.25 percentage points from 4.25 percent to 4 percent.

This is the reserves’ first cut since December 2024.

The reserve officials, in an announcement, indicated they expect two more quarter-point rate cuts this year.

Speaking to journalists, Jerome Powell, chair of the Federal Reserve said “the balance of risks has shifted toward the employment side of the Fed’s mandate, where as the risks had previously been tilted toward inflation”.

Powell also said the projected cuts should be seen as more of a “probability” than a “certainty”.