UK 'not out of woods' on inflation, says Bank as rates held

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UK interest rates have been held at 4% as the Bank of England governor warned "we're not out of the woods yet" in terms of rising inflation.

Analysts had not expected interest rates, which influence borrowing costs and returns on savings, to be cut given that prices are rising at nearly twice the Bank's target rate.

The Bank said it expected inflation to return to its key target of 2%, but remains cautious on when it will again trim borrowing costs.

Governor Andrew Bailey said: "We're not out of the woods yet so any future cuts will need to be made gradually and carefully."

Alongside the interest rate decision, the Bank also announced it would reduce the amount of government debt it holds at a slower pace, coming just weeks after turmoil in the financial markets.

As Chancellor Rachel Reeves prepares to announce the Budget in November, a higher cost of servicing Britain's vast pile of debt risks reducing the amount of headroom she has against her self-imposed tax and spending rules.

The Bank of England bought £875bn worth of bonds during times of crisis to support the economy.

It has been reducing the amount of debt it owns – which are mainly government bonds – by around £100bn a year. But on Thursday it said that from October onwards, it would reduce that to £70bn.

Mr Bailey said the change would allow the Bank to carry on with its plans "while continuing to minimise the impact on gilt market conditions".