Bank of England keeps rate steady despite low inflation

The Bank of England has kept its main interest rate at a 16-year high of 5.25 per cent, even though inflation has fallen to its target of two per cent.

In a statement , some policymakers on the bank's nine-member Monetary Policy Committee voiced worries that some underlying measures of inflation, such as in the services sector, remained elevated, which could be stoked further if interest rates were cut too soon.

"It's good news that inflation has returned to our two per cent target," Bank of England Governor Andrew Bailey said on Thursday.

"We need to be sure that inflation will stay low and that's why we've decided to hold rates at 5.25 per cent for now."

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Interest rates have been unchanged since August after a series of hikes.

The decision, which was widely anticipated by economists, is likely to disappoint the governing Conservative Party ahead of the UK's general election in two weeks.

A cut would have been seized upon by Prime Minister Rishi Sunak as positive economic news, especially as it would have been accompanied by a fall in mortgage rates.

The panel insisted the imminent election, which the Labour Party led by Keir Starmer is widely expected to win, had no bearing on its decision.

Figures on Wednesday showed inflation, as measured by the consumer prices index, fell to two per cent in the year to May from 2.3 per cent the month before with food prices providing the biggest downward contribution.

The decline does not mean that prices are falling, just that they are rising at a slower rate than they have for the past few years during a cost-of-living crisis that has seen living standards drop for millions across Britain.

The fall in inflation follows nearly three years of above-target inflation.

Inflation was last at two per cent in July 2021 before prices started to shoot up, first as a result of supply chain issues during the coronavirus pandemic and then because of Russia's invasion of Ukraine, which pushed up energy costs.

The Bank of England, like the US Fed and other central banks, raised interest rates aggressively from near zero to counter the rapid increase in inflation, which hit a peak of above 11 per cent in late 2022.

Higher interest rates have helped ease inflation, but they have also weighed on the British economy, which has barely grown since the pandemic rebound.