The Bank of England's Monetary Policy Committee has voted 6-3 to maintain Bank Rate at 5.25%.
Two members voted to increase Bank Rate by 0.25 percentage points, while one member preferred to reduce Bank Rate by 0.25 percentage points - the first vote for a cut since the pandemic started almost four years ago.
Interest rates have now been at 5.25% since August 2023, with many economists predicting that rates will begin to fall later this year.
However, two weeks ago inflation saw a surprise increase to 4%, the first time the rate has increased since February 2023, leading some experts to believe that the Bank could hold interest rates for longer.
Inflation has fallen from a peak of 11% in 2022 and the Bank predicts that inflation will fall further by the end of this year to around 2.75%, but could drop as low as 2% for a brief period.
Still, the MPC judges that risks to inflation are still currently "skewed to the upside", stemming from geopolitical factors.
The Committee's latest report shows that Bank Rate is expected to fall to 3.25% in the next two years.
Max Shepherd, group economist at Yorkshire Building Society, said: “The Bank of England’s decision to hold interest rates at 5.25% comes as no shock, as the MPC continues to monitor the dynamics between wage growth – where we’ve yet to see the impacts of first quarter pay settlements and the National Living wage increase – and inflation.
“For the time being, the fear of reigniting inflation is outweighing the need to stimulate economic growth. There’s also the potential for inflationary pressure from the March Budget and ongoing tensions in the Red Sea.
“That said, the inflation forecast now dropping to the 2% target by Q2 2024 (albeit rising to around 2.75% by the end of the year), coupled with subdued GDP growth, are likely to amplify calls for the Bank to start cutting interest rates sooner rather than later.”
Karen Noye, mortgage expert at Quilter, commented: "In light of the Monetary Policy Committee's decision to maintain interest rates at their current rate, the recent moves by lenders to trim mortgage rates take on a particularly significant role in the current economic landscape. Many lenders have been reducing deals with some reductions reaching up to 0.85 percentage points before today’s announcement. This competitive posturing ahead of the decision is a calculated response to the dual pressures of the market and the evolving expectations of monetary policy.
"The initial aggressive rate cuts by lenders since January and before have been sparked by the market's bet on stabilised borrowing costs. This has evidently led to a mini war of rates, benefitting consumers but also revealing the market's sensitivity to policy signals.
"Without the certainty of a further cut it seems unlikely that mortgage rates can fall much further. The rise in swap rates — an essential benchmark for pricing fixed rate mortgages —signifies mounting pressures that could reverse the recent trend of falling mortgage rates. This scenario not only affects borrowers but also has broader implications for housing market activity and, by extension, the economy.
"The recent dip in mortgage rates and the subsequent uplift in housing market activity may be signs of being out of the woods or simply just a momentary reprieve during a period marked by higher interest rates and cautious consumer behaviour. The slowdown in residential transactions towards the end of 2023, as reported by HMRC yesterday, illustrates the tangible impact these conditions have on the property market.
"Speculation about rate cuts later in the year fuels optimism for a more buoyant housing market, potentially leading to increased affordability for homebuyers. However, the path forward is fraught with uncertainty. Fixed rate mortgages, which have so far benefited from a more competitive environment, may face upward pressure if the anticipated easing of monetary policy does not materialise as expected."
Paresh Raja, CEO of Market Financial Solutions, added: “The Bank of England continues to walk a tightrope. Sticky inflation is making them hesitant to cut rates, but a rise in company insolvencies and the general impact of a higher cost of borrowing on the UK economy is piling on pressure to drop the base rate.
“Either way, we now know the base rate has almost certainly peaked, and it is just a matter of time before it comes back down. This shift has already started to have an impact on lenders and the property market in recent months. Mortgage, bridging and buy-to-let rates all have started to fall, and there are the green shoots of recovery emerging after two challenging years, with early signs suggesting buyer demand and house prices are picking up. The Bank might hold again – perhaps multiple times – before the cuts come, but the market is benefitting as that seemingly inevitable decision draws closer.”
