Bank of England holds rates at 5.25% but warns it's 'much too early to consider cuts'

The Bank of England has decided to hold interest rates - ITV News' Economics Editor Joel Hills explains

Unemployment is rising, the UK economy is trundling along, barely registering growth.

In the good old days, if the outlook was this dismal and employment was weakening in the way it is, the Bank of England would be lowering its inflation projections and preparing to cut interest rates.

But today, the Bank kept the cost of borrowing at 5.25% and suggested that rates are currently more likely to move up rather than down.

“We’ve held rates unchanged this month, but we’ll be watching closely to see if further rate increases are needed. It’s much too early to be thinking about rate cuts”.

The Bank’s Monetary Policy Committee voted by a majority of 6-3 to hold interest rates at current levels. Three members voted for another hike.

The Bank’s concern is that high inflation looks persistent.

'Our job is to get inflation back to 2% and that is what we'll do,' says Andrew Bailey, Governor of the Bank of England

The headline annual rate stood at 6.7% in September. The Bank thinks it’s likely to be the end of 2025 before it falls back its 2% target - that’s six months later than it was projecting back in August.

Wage growth is the issue. The Bank worries that there are still an unusually large number of unfilled jobs in the economy and that pay (in the private sector) is rising at 8% a year, if the official data is correct. The Bank concludes that the only way companies can fund 8% pay deals is by raising their prices again.

The Bank’s objective here is to push up interest rates and hold them at a high enough level until there’s compelling evidence that the upward pressure on pay has faded.

The danger of waiting to see “the whites of inflation’s eyes” (as a member of The Fed, the US central bank, recently put it) is that you overdo the medication, or “over-tighten” in economist-speak.

It’s a risky strategy. The Bank is not forecasting a recession but expects the economy to basically flatline between now and the end of 2025.

It wouldn’t take much more than a nudge for the growth to turn negative - the Bank estimates the probability of the economy contracting at some point during this period at just under 50%.

As ever, the future is unknowable and anything could happen next.

The conflict between Israel and Gaza is judged not to be a material economic risk currently but that could obviously change if the war escalates.

British households and businesses look resilient but that could change too as higher interest rates continue to bite.

Nine million homes in the UK have mortgages. Almost half have yet to feel any impact of higher interest rates.

The Bank is stating openly that it thinks rates will have to be “restrictive” for quite a while. The market is betting it will be next August before we see a cut and that Bank Rate will still be above 4% in three years time.

As things stand, the squeeze on mortgage holders looks set to continue for a long time to come.

Want a quick and expert briefing on the biggest news stories? Listen to our latest podcasts to find out What You Need To Know...