The Bank of England has held interest rates at 4% as policymakers warned the UK was "not out of the woods" on inflation. The Monetary Policy Committee voted to keep rates unchanged following a 0.25 percentage point cut in August.
Governor Andrew Bailey said: "Although we expect inflation to return to our 2% target, we're not out of the woods yet so any future cuts will need to be made gradually and carefully." The committee said it was being cautious about cutting borrowing costs until it had more evidence that pressures on UK inflation were easing.
Consumer Prices Index inflation stayed at 3.8% in August, remaining at the highest level since the beginning of 2024 and above the Bank's 2% target rate. Official data released on Wednesday showed prices continuing to rise faster than the central bank's preferred level.
Food price pressures mount
Food and drink inflation rose to 5.1%, marking the fifth consecutive month that price rises had accelerated. The MPC said evidence from its network of agents across the UK pointed to higher commodity prices as accounting for much of the increase over the past year, particularly for beef, cocoa beans and coffee.
Labour costs and costs associated with new packaging regulation had also contributed to rising food prices. Several large retailers and industry groups have warned that rising business costs including national insurance contributions, minimum wage increases, and new packaging taxes have put pressure on shop prices.
Global trade uncertainty grows
The committee said the outlook for global trade policy continued to be "highly uncertain" as a result of rising US tariffs. While global growth has remained steady, this might partly reflect companies "front-loading" exports, new tariff rates being paused, and some goods exports being rerouted.
The impact of higher tariffs could therefore be "slower, although not necessarily smaller" than the Bank had previously assumed. The decision comes after the Federal Reserve in the US lowered its interest rate on Wednesday by 0.25 percentage points, the first cut the central bank has made this year amid signs of a weakening jobs market.
Bond selling programme scaled back
The MPC announced it was slowing the pace of selling UK government bond purchases, known as gilts, in the year ahead amid changing financial market conditions. It reduced the size of its quantitative tightening target from £100 billion to £70 billion.
Bailey said the move means the committee can "reduce the size of the Bank's balance sheet" while ensuring to "minimise the impact on gilt market conditions". The plans include selling fewer long-term gilts to reflect current market demand.
Sources used: "PA Media" Note: This article has been edited with the help of Artificial Intelligence.
