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Peak rates speculation mounts as Bank of England keeps cost of borrowing on hold at 5.25%

The Bank of England has left the cost of borrowing on hold, amid growing speculation in the City that the UK has now arrived at peak interest rates.

The Monetary Policy Committee voted 5-4 to leave base rates at 5.25% in a close call that ended its run of consecutive rate hikes at 14. The dissenters all backed a quarter-point rise.

Rates have been rising since December 2021 in a hard-fought battle against inflation, made worse by higher energy costs after Russia’s invasion of Ukraine.

Hopes that rates may have peaked follow two successive months when the consumer price index has fallen by more than expected, reaching 6.7% for August, heading toward the BOE’s official 2% target. The core CPI, which the Bank pays close attention to, fell sharply from 6.9% to 6.2%.

The decision means repayments on tracker mortages and other variable-rate loans will not go up after an MPC meeting for the first time in almost two years.

Gordon Shannon, portfolio manager at TwentyFour Asset Management, said: “ Yesterday’s lower inflation data flipped the bond market from being fairly confident of a hike today to pricing the decision as a coin toss.

“The Bank of England has chosen to cross its fingers and hope early signs of falling inflation continue. What worries me is even as unemployment creeps up, wage growth is continuing at a pace inconsistent with low inflation. The UK now faces the risk of entrenched inflation expectations.”

Suren Thiru at the Institute of Chartered Accountants in England and Wales called the BOE rate call “unexpected” and “right”, adding:

“It will come as a relief for those people struggling with their mortgage bills.

“Hopefully this decision means the Bank of England is becoming more forward looking in setting interest rates rather than being fixated on backward-looking data, given the large time lag between rate rises and their full impact on households and businesses.”

The pound slipped back as investors measured the prospects of peak rates in the UK. Sterling was down 0.6% at $1.2274 after the decision.

But today’s close call on the MPC could mean that the decision to hold turns out to be a pause rather than a peak, with the door open to further action, as policymakers keep close watch on wages and inflation data.

Marcus Brookes, chief investment officer at Quilter Investors, said: “While it may return to raising rates later in the year or into next year, the Bank of England has been bold and is signalling that its job is nearly done for now,” adding:

“This doesn’t mean the pain will simply go away for businesses and consumers. The BOE has made it clear that rates will be higher for longer, so investors need to prepare accordingly.”

On the stock maket, shares in housebuilders rallied in line with the outlook for steadier mortgage rates. Barrat Developments was up over 18p to 483p. London-focused home builder Berkeley Group was up 131p at 4326p.

Overall, the FTSE 100 was 15 points weaker at 7716.54, held back by weaker multinational resource stocks. The mid-cap FTSE 250, home to more UK-focused companies, was up 9 points at 18721.33, with retailers on the leaderboard.

Richard Campo, founder of London mortgage broker Rose Capital Partners said he was “very pleased” with the pause, but wondered why “in 2023 the best policy tool we can come up with for inflation is simply raising interest rates until the pain slows the economy and spending, causing a lot of unnecessary stress on already hard-pushed households at a time of a cost of living crisis.”