Bank of England Keeps Rates Steady for First Time in Nearly Two Years

The Bank of England left interest rates unchanged on Thursday, the first time in nearly two years that it opted to not raise rates amid a long-running battle against stubbornly high inflation.

The decision came a day after data showed inflation in Britain unexpectedly slowed in August. Policymakers at the central bank kept interest rates at 5.25 percent, the highest since early 2008, pausing after 14 consecutive rate increases.

“Inflation has fallen a lot in recent months, and we think it will continue to do so,” Andrew Bailey, the governor of the central bank, said in a statement. “But there is no room for complacency.”

Interest rates need to be “sufficiently restrictive for sufficiently long” enough to return inflation to the central bank’s 2 percent target, according to the minutes of this week’s policy meeting. Officials also left the door open for further rate increases, “if there were evidence of more persistent inflationary pressures,” the minutes said.

The Bank of England’s pause comes during a long and tumultuous struggle against inflation that officials warned was not over. The central bank began its tightening cycle in December 2021, raising rates from near zero to levels last seen during the financial crisis of 2008. In that time, inflation has soared faster than economists expected and has remained high, even though it is down from its peak of about 11 percent in October.

Policymakers have come under significant public pressure for not maintaining a stronger hold over inflation and not foreseeing the problem in their forecasts. The central bank has said Ben Bernanke, the former U.S. Federal Reserve chair, will lead a review into the bank’s forecasting processes.

But this week, some news landed in the central bank’s favor. Consumer prices rose 6.7 percent in August from a year earlier, down slightly from the previous month. Economists had expected the rate to increase because of a global rise in energy prices. Instead, slower food price inflation and other factors pulled the overall rate of inflation down.

Better still for the central bank, measures of domestic inflationary pressures also slowed. The annual rate of core inflation, which strips out energy and food costs, which tend to be more volatile and influenced by international markets, fell to 6.2 percent in August, from 6.9 percent the previous month. And services inflation, which is heavily influenced by companies’ wage costs, slowed by more than the central bank’s forecast, even after accounting for the impact of travel services in the summer when they tend to be more volatile.

As inflation rates drop across much of the world and economies are weakening, in part because of the aggressive policy tightening by central banks, policymakers are trying to carefully calibrate the right level of interest rates. Several central banks are shifting their focus from how high to raise interest rates to how long they will need to stay elevated to bring down inflation without causing unnecessary economic pain.

On Wednesday, the Federal Reserve left interest rates unchanged, but officials suggested that they still expect to make another rate increase before the end of 2023 and keep rates high through next year. Last week, policymakers at the European Central Bank said they were likely done raising interest rates, based on their assessment of the economy, and would keep rates at their high levels “for a sufficiently long duration.”

Before the Bank of England’s decision was announced, there was an almost even chance that the central bank would raise or hold rates, according to trading on financial markets. In the end, it was a split decision among the nine members of the central bank’s rate setting committee. Five policymakers, including Mr. Bailey, voted to hold rates steady, citing lower-than-expected inflation rates and signs that the labor market was loosening, with higher unemployment and fewer job vacancies.

The other four, including the newest member, Megan Greene, voted to raise interest rates by a quarter point, arguing that the resilience in the economy, high wage growth and other indicators showed there was evidence of more persistent inflationary pressures.