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The Bank of England building, in London, on Aug. 4, 2022.MAJA SMIEJKOWSKA/Reuters

The Bank of England halted its long run of interest-rate increases on Thursday as Britain’s economy slowed and inflation fell, but Governor Andrew Bailey sought to stress the central bank did not think its job was done.

A day after Britain’s fast pace of price growth unexpectedly slowed, the BoE’s monetary-policy committee voted by the narrowest margin of 5-4 to keep 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 more than half a cent against the U.S. dollar, to its lowest since late March, and also weakened against the euro as investors downgraded their bets that interest rates would be increased further.

But rate futures suggested they still saw a 50-per-cent chance of Bank Rate rising to 5.5 per cent by the end of this year.

Britain’s economy, hit hard by Brexit, the COVID-19 pandemic and the surge in gas prices triggered by Russia’s invasion of Ukraine, has been struggling with the highest inflation rate in the Group of Seven.

But growth remains fragile, heightening the risk that the BoE’s 14 back-to-back rate hikes will push the economy into a recession.

“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 committee said in a statement.

Mr. Bailey said he would not predict the BoE’s next move, but told broadcasters it would be “very, very premature” to lower interest rates.

The BoE 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.

Mr. Bailey and his colleagues have faced intense criticism after consumer price inflation surpassed 11 per cent in October last year.

At 6.7 per cent in August, inflation is falling toward the 5-per-cent level the BoE has predicted for the coming months – and which British Prime Minister Rishi Sunak has promised to voters ahead of an election expected next year.

But it remains more than three times the central bank’s 2-per-cent target.

In its statement, the BoE said record growth in workers’ pay, which has been its biggest concern, was not backed up by other measures of the labour market, suggesting it expected wage growth to slow soon.

The committee also sounded unfazed by a recent climb in oil prices. “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,” it said.

Services inflation was expected to remain elevated, however.

“The question now is firmly centred on whether this pause will remain or if another rate rise will be needed in November,” said Frances Haque, chief economist with Santander UK. “Only time and further economic data will tell.”

On Wednesday, the U.S. 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 monetary-policy committee 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,” its statement said, repeating the guidance that monetary policy would be “sufficiently restrictive for sufficiently long” to get inflation back to its 2-per-cent target from 6.7 per cent in August.

Mr. Bailey and other monetary-policy committee members have recently suggested they were close to putting rates on hold but they have also stressed that borrowing costs are likely to remain high to ensure inflation pressures are squeezed out of the economy.

Yael Selfin, chief economist at KPMG UK, said a first cut in rates could come only from November, 2024.

In a separate statement on Thursday, Mr. 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.”

Investors sensed the BoE was now done with its run of rate increases, however.

“Despite efforts in the statement to keep the door open to further hikes, many investors will now assume that the Bank of England’s hiking cycle has concluded,” said Hugh Gimber, global market strategist at J.P. Morgan Asset Management.

The monetary-policy committee sped up the pace of its program to shrink the huge stockpile of government bonds the central bank acquired over nearly 15 years as it sought to steer the economy through the global financial crisis and the coronavirus pandemic.

As expected, the stockpile will be reduced by 100 billion pounds over the next 12 months – via sales and allowing bonds to mature – to a total of 658 billion pounds, the BoE said, faster than the 80-billion-pound reduction over the past year.

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