Bank of England holds interest rates at a 15-year high at 5.25% despite economic woes

The Bank of England has kept borrowing rates unchanged despite mounting worries over the state of the British economy. The central bank on Thursday left its main interest rate at a 15-year high of 5.25 per cent, where it has stood since August following the end of nearly two years of hikes.

While the interest rate increases have helped in the battle against inflation, the squeeze on consumer spending, primarily through higher mortgage rates, has weighed on British economic growth.

On Wednesday, the US Federal Reserve also kept rates on hold. The European Central Bank, which sets policy for the 20 European Union countries that use the Euro currency, is expected to do the same Thursday.

The Fed has signalled it expects to make three interest rate cuts next year, while market expectations also foresee cuts by the ECB. The Bank of England is widely thought to be further away from cutting rates than its counterparts, with inflation in the UK higher than in the US or in the eurozone.

The Bank of England has managed to get inflation down from a four-decade high of over 11 per cent — but there's still a ways to go for it to get back to its 2 per cent target. Inflation, as measured by the consumer price index, stood at 4.6 per cent in the year to October, still too high for comfort.

Holding that high rate follows two years of hikes that targeted a surge in inflation, first stoked by supply chain issues during the coronavirus pandemic and then Russia's invasion of Ukraine, which pushed up food and energy costs. Its decision comes during a busy pre-Christmas bout of central bank activity.

While the interest rate increases have helped in the battle against inflation, the squeeze on consumer spending, primarily through higher mortgage rates, has weighed on British economic growth.

Figures on Wednesday showing that the British economy contracted by 0.3 per cent in October from a month earlier have fuelled concerns about the near-term outlook on growth, especially as many households have yet to feel the impact of higher mortgage rates.

“The poor performance on the UK economy in October will inevitably reignite speculation about whether the country is back in recession," said James Smith, research director at the Resolution Foundation. “But what's not beyond doubt is that Britain is a stagnation nation — the 0.5 per cent growth over the past 18 months is the weakest outside of a recession on record.”

High interest rates and low economic growth are hardly the ideal backdrop for the governing Conservative Party in next year's general election, which opinion polls suggest it will lose to the main opposition Labour Party.

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