UK interest rate freeze ends run of 14 straight increases

Image source, Getty Images

In a surprise move, UK interest rates have been left unchanged after the Bank of England said price rises were slowing faster than expected.

Interest rates were held at 5.25%, already their highest for 15 years.

It comes after figures on Wednesday revealed an unexpected slowdown in inflation in August.

"Inflation has fallen a lot in recent months, and we think it will continue to do so," said Bank governor Andrew Bailey.

There were also "increasing signs" that higher rates were starting to hurt the UK economy, the Bank said.

The Bank has raised rates for the past 14 times in a row in its battle to tame inflation - the rate at which prices rise - which remains much higher than usual.

The increases have led to higher mortgage payments for many homeowners and on loans, but also higher savings rates.

Many analysts had expected rates to rise again, but the Bank's decision to leave them on hold raises the prospect that this is a turning point.

However, in a statement on X - formerly known as Twitter - Mr Bailey warned there was "no room for complacency", indicating rates could stay at current levels for longer than expected.

"We will be watching closely to see if further increases are needed, and we will need to keep interest rates high enough, for long enough to ensure we get the job done. Whatever happens we will do what is needed to get inflation back to normal."

Image source, Nicola Valentine

Nicola is praying that rates have now peaked

Nicola Valentine says she is "breathing a sigh of relief" on hearing that rates are being held.

But the tax accountant, from Isleham, Cambridgeshire, is still "hugely anxious" because her mortgage is due to go up by about £300 a month.

Her 2.9% fixed-rate mortgage deal expires in November. She has cancelled TV and gym subscriptions, and stopped buying new clothes and takeaways, but still does not know how she will find the extra money.

"I'm praying the rates have peaked now and will start to go down because this is really unsustainable for me. I feel completely helpless," she says.

The Bank's decision was a very close call, with four of the nine-strong rate-setting Monetary Policy Committee (MPC) voting for a rise, and five opting for a pause. Mr Bailey used his casting vote to pause the relentless series of rate rises.

In the end the inflation figures on Wednesday, which showed all of the main measures on cost of living easing, was enough for the Bank to conclude its medicine is working.

The chancellor has welcomed it as such.

"We are starting to see the tide turn against high inflation, but we will continue to do what we can to help households struggling with mortgage payments," said Jeremy Hunt.

"Now is the time to see the job through. We are on track to halve inflation this year and sticking to our plan is the only way to bring interest and mortgage rates down."

Both the Bank, and the Treasury, however, will be wary of warnings of "premature celebration" from the International Monetary Fund, which has flagged how the jump in energy prices in the 1970s triggered inflation that proved tough to defeat.

The decision to hold rates will bring some relief to homeowners with tracker mortgages who have seen their monthly repayments get consistently more expensive.

For those coming to an end of their fixed-rate deal, there will also be some hope that mortgage rate rises have halted.

There is some competition back in the mortgage market and, if this is the end of a run of rate rises, then lenders may have even more confidence to offer better deals.

However, there are warnings from the sector that this latest decision could lead to more of a plateau than any significant drops in mortgage rates.

Savers, meanwhile, are likely to be told that the returns they can get - the highest for about 15 years - may not improve much more, so shopping around for the best deal becomes a little more urgent.

The theory behind raising rates is that it makes it more expensive for people to borrow money, so households will cut back and buy fewer things. It also might mean that firms will raise prices less quickly.

But it is a tricky balancing act, as raising rates too aggressively could cause people to cut back on their household spending, hitting businesses and economic growth.

The MPC said that since June, inflation had fallen much faster than expected, dropping to 6.7% in August.

But it also said that unemployment was inching up and overall economic growth was "weaker than expected".

For these reasons it kept rates on hold. But the MPC added that rates would need to remain "sufficiently restrictive for sufficiently long" to get inflation back down to the Bank's 2% target. It is not expected reach this rate until 2025.

Further rate increases might be needed if price rises start accelerating again, it added.