Bank of England holds key rate as it warns of ‘heightened uncertainty’

globalnews.ca:

The U.K.’s central bank warned Thursday of “heightened uncertainty” as it kept interest rates on hold after inflation moved further above target, even at a time when the British economy is flatlining at best.

The Bank of England’s nine-member Monetary Policy Committee kept its main interest rate unchanged at 4.75% with new data showing inflation rising to 2.6%, further above the bank’s 2% target.

In response the rate-setting panel, which last cut its key rate in November, is taking a cautious stance because lower borrowing costs could potentially stoke inflation even further.

The decision was widely anticipated in financial markets yet surprisingly, as many as three of the members voted for a quarter-point cut. That could hint at a further reduction at the next policy meeting in February if there are no big inflation surprises.

“We need to make sure we meet the 2% inflation target on a sustained basis,” said Bank Gov. Andrew Bailey, who voted to keep rates on hold. “We think a gradual approach to future interest rate cuts remains right, but with the heightened uncertainty in the economy we can’t commit to when or by how much we will cut rates in the coming year.”

Struggling sectors in the U.K. economy and homeowners are hoping for more cuts next year that would provide some relief. The British economy has now contracted for two months in a row.

“The bank’s decision to keep interest rates on hold, while expected, will still come as a palpable blow to households battling with burdensome mortgage bills and businesses facing a jump in costs following the autumn budget,” said Suren Thiru, economics director at the Institute of Chartered Accountants in England and Wales.

The bank’s decision arrives a day after the U.S. Federal