Why has the UK frozen interest rates?

The UK has announced that it will freeze interest rates after raising them 14 times in a row. The Bank of England says the surprise move is partly because prices slowed faster than originally expected in August.

The base interest rate in the UK currently stands at 5.25 percent - the highest it's been for 15 years. Another hike was expected on Thursday but a slowdown in inflation has prompted a change in approach.

"Inflation has fallen a lot in recent months, and we think it will continue to do so," said bank governor Andrew Bailey. He added that there were "increasing signs" that higher interest rates were harming the economy.

Falling food and services prices contributed to the decision. /Maja Smiejkowska/Reuters
Falling food and services prices contributed to the decision. /Maja Smiejkowska/Reuters

Falling food and services prices contributed to the decision. /Maja Smiejkowska/Reuters

Mark Ostwald, Chief Economist and Global Strategist at ADM ISI, says that falling food prices and a host of other factors have ultimately contributed to falling inflation.

"The decrease in inflation yesterday has been driven by falling food prices and services prices, particularly for things such as hotels, restaurants and travel, that's started to ease some of the pressure on services inflation, the key area they were worried about," he told CGTN.

Wages in the UK have continued to grow. In August, the Office for National Statistics revealed that wages in the UK grew 7.8 percent in the three months to June, the fastest annual rate since records began. But Ostwald says that could begin to change.

"Wage growth remains high but the wage growth is partly structural and it's also a lagging indicator," says Ostwald. "Other indicators of wage growth have turned lower and the labor market has loosened. It's a combination of things."

The Bank of England has set a long term target to reduce interest rates to 2 percent but it's warned that there is still some way to go before it considers cutting interest rates. Bailey said there was still a "long way to go" and warned against "premature celebrations."

Otswald says other factors could still spark an increase in interest rates in the months ahead, but believes a period of stability may ensue between now and the middle of next year.

"I think inflation won't be a straight line," he added. "Renewed pressure on oil prices will hit pump prices but it's on the way down. As far as rate hikes, unless there's a nasty surprise from energy prices, which there could still be, I suspect we'll stay at this level for a considerable time until the end of next year." 

Why has the UK frozen interest rates?

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