The Bank of England has halted its long run of interest rate increases as the British economy slows but says it is not taking a recent fall in inflation for granted.
A day after a surprise slowing in Britain's fast pace of price growth, the BoE's Monetary Policy Committee on Thursday voted by a narrow margin of 5-4 to keep the bank rate at 5.25 per cent.
Four members - Jon Cunliffe, Megan Greene, Jonathan Haskel and Catherine Mann - voted to raise rates to 5.5 per cent.
It was the first time since December 2021 that the BoE did not increase borrowing costs.
Sterling fell by half a cent against the United States dollar to its lowest since late March and it also weakened against the euro.
Investors put only a 10 per cent chance on the bank rate going any higher in the coming months.
Britain's economy has been hampered by the highest inflation rate in the Group of Seven even as growth remains fragile, raising the risk for the BoE of pushing it into a recession with its 14 back-to-back rate hikes to date.
"There are increasing signs of some impact of tighter monetary policy on the labour market and on momentum in the real economy more generally," the MPC said in a statement.
It cut its forecast for economic growth in the July-September period to just 0.1 per cent from August's forecast of 0.4 per cent and noted clear signs of weakness in the housing market.
Growth for the rest of the year was likely to be weaker than previous forecasts, the BoE said.
Record growth in workers' pay, which has been a big concern for the central bank, was not backed up by other measures of the labour market, it noted, suggesting the BoE's policymakers expected it to slow down soon.
"CPI inflation is expected to fall significantly further in the near term, reflecting lower annual energy inflation, despite the renewed upward pressure from oil prices," the BoE said.
But it said services inflation was expected to remain elevated.
The BoE's decision to pause its rate hikes came a day after the US Federal Reserve also opted to keep borrowing costs on hold.
Last week, the European Central Bank raised rates but suggested its move might be the last for now.
The MPC reiterated its message that it was prepared to raise borrowing costs again if needed.
"Further tightening in monetary policy would be required if there were evidence of more persistent inflationary pressures," the statement said, and it repeated the guidance that monetary policy would be "sufficiently restrictive for sufficiently long" to get inflation back to its 2.0 per cent target from 6.7 per cent in August.
Governor Andrew Bailey and other MPC members have recently suggested the BoE was close to pausing its run of interest rate increases but they have also stressed that borrowing costs are likely to remain high to ensure inflation pressures are squeezed out of the economy.
In a separate statement on Thursday, Bailey welcomed the recent fall in inflation and BoE forecasts that it would continue to ease.
"But there's no room for complacency," he said.
"We need to be sure inflation returns to normal and we will continue to take the decisions necessary to do just that."
Australian Associated Press
