Bank of England holds interest rate at 16-year high of 5.25%, despite drop in inflation rate

21 March 2024, 12:05 | Updated: 21 March 2024, 12:29

The Bank of England has held interest rates at 5.25%, a 16-year-high.

The Bank was expected to hold its base rate at that level despite an announcement that inflation had dropped more than expected on Wednesday.

Thursday's announcement marks the fifth time in a row that the Bank has held its interest rate at the same level. Last time, two members of the Bank's monetary policy committee voted for another rate hike to 5.5%. This time, eight voted to hold and one to cut the rate.

High interest rates are intended to slow down spending, which is a measure for controlling inflation.

Inflation has been very high recently - reaching a 40-year peak in October 2022 - but has come down significantly in recent months. The inflation rate fell to its lowest level since September 2021, according to Wednesday's figures.

Read more: Inflation eases to 3.4% in February, the lowest level in two years, down from 4% last month

Read more: Bank of England holds interest rates at 5.25% - keeping borrowing costs at highest level for 15 years

Some are concerned that recent events, such as the attacks on ships in the Middle East, could push inflation upwards again in the near future.

But many economists expect the base rate to be cut in June, once the Bank of England sees more evidence that inflation is under control. The US Federal Reserve and the European Central Bank also held interest rates this month.

Susannah Streeter of Hargreave Lansdown said: "The Bank of England is continuing to keep an iron grip on high interest rates, with the monetary policy committee not for turning, despite inflation dropping back more sharply than forecast.

"The Bank of England has adopted the same stance as the Fed yesterday and the ECB last week, indicating that inflation is following the right path, but it's still wary about the potential for prices to bubble up again."

The UK's base rate has remained the same since August last year, and some commentators believe this has had a positive effect on mortgage rates, and therefore the housing market.

Paul Broadhead, head of mortgage and housing policy at the Building Societies Association, said that the bank's decision to hold the base rate steady on Thursday had been "widely expected".

He added: "The anticipated cuts later in the year have already seen a reduction in mortgage rates, which has led to an improvement in consumer confidence in the housing market. 

“This month fewer people said they are concerned about being able to pay their mortgage, with 90% saying they are confident that they can maintain their mortgage payments – an increase from 85% in December 2023."

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Paresh Raja, CEO of Market Financial Solutions, said: “Yesterday’s inflation data didn’t fall enough to move the needle for the Bank of England, but the property market is already benefitting from the stability that a static base rate provides.

"Mortgage rates have fallen, buyer demand has risen, and we’ve seen a return to growth where house prices are concerned, all contributing to a solid start to the year for the property market."

It comes after the Office for National Statistics announced on Wednesday that inflation had fallen to 3.4%, the lowest level in two years, down from 4% last month.

That was lower than the 3.5% predicted by many economists.

The government's target for inflation is 2% - which the UK is expected to reach within a few months.