UK interest rates to stay higher for longer, Bank of England says

Interest rates will stay higher for longer, the Bank of England has said for the first time, in an effort to drive down stubborn inflation.

The Bank revealed the tactic to curb price growth as it announced another rise in rates to 5.25% from 5%.

It is the 14th increase in a row and takes borrowing costs to a fresh 15-year high.

The Bank also cut its forecasts for economic growth but said the UK would continue to avoid a recession.

On Thursday, the Bank signalled for the first time that it would keep interest rates elevated and that they would not automatically fall once inflation returns to normal levels.

Inflation, which measures the pace of price rises, slowed substantially in June to 7.9%. However, it remains nearly four times higher than the Bank of England’s 2% target.

The Bank said that its rate-setting Monetary Policy Committee “will ensure that the bank rate is sufficiently restrictive for sufficiently long to return inflation to the 2% target sustainably”.

Governor Andrew Bailey said: “Inflation is falling and that’s good news. We know that inflation hits the least well-off hardest and we need to make absolutely sure that it fall all the way back to the 2% target. That’s why we’ve raised rates to 5.25% today.”

The Bank also admitted that it could take slightly longer for inflation to slow.

While it stuck to a previous forecast that the pace of price rises will slow to around 4.9% by the end of this year, the Bank said inflation would only hit its 2% target between April and June in 2025.

In May, it expected to reach that milestone by the first three months of 2025.

The Bank stuck to recent guidance that the UK economy will not fall into recession but growth is expected to be sluggish.

UK gross domestic product, which measures the value of the goods and services produced by a country, is forecast to grow by 0.5% in 2024 – which is a potential election year – and by just 0.25% in 2025.

It expects the succession of interest rate rises, which began in December 2021, will start to weigh more heavily on demand by next year.

In May, the Bank had forecast GDP growth of 0.75% for 2024 and the following year.

It said on Thursday that GDP growth was “expected to remain below pre-pandemic rates” for some time.