End of 14 consecutive interest rate increases in the UK as freeze takes effect

The Bank of England has surprised markets by keeping interest rates unchanged at 5.25%. This decision comes after data showed a unexpected slowdown in UK price rises in August. Bank governor Andrew Bailey stated that inflation has fallen significantly in recent months and is expected to continue to do so. This is a departure from the Bank's previous stance of raising rates 14 times in a row to curb inflation. However, Bailey cautioned against complacency and emphasized the need for inflation to return to normal levels. The Bank has been raising rates since December 2021 to address high inflation in the UK that has put financial strain on households. Despite the decision to hold rates, there is speculation that this cycle of rate increases may have peaked. Chancellor Jeremy Hunt welcomed the move, expressing his commitment to reducing inflation and alleviating the burden on mortgage payments. The decision to keep rates unchanged hinged on Bank governor Andrew Bailey's casting vote, with evidence of declining inflation measures being a key factor. While rates may stay at current levels for a longer period, the Bank sees this as a turning point. However, there are concerns of premature celebration, particularly in light of warnings from the International Monetary Fund. The theory behind raising rates is to curb borrowing and spending, but striking the right balance is crucial to avoid harming economic growth. The Bank's Monetary Policy Committee highlighted faster-than-expected drops in inflation since June, rising unemployment, and weaker-than-anticipated economic growth as factors influencing the rate decision. While rates are expected to remain restrictive until inflation returns to the Bank's 2% target, further rate increases may be necessary if price rises accelerate again. Initially, investors anticipated an increase to 5.5%, but sentiment shifted after Wednesday's inflation figures. The MPC was divided, with five members favoring keeping rates unchanged and four supporting a 0.25 percentage point rise.