The Bank of England has decided to maintain its main interest rate at 5%, even though the U.S. Federal Reserve recently made a substantial cut. This reduction by the Fed is its first since the beginning of the coronavirus pandemic over four years ago.

The Bank of England decided to maintain its main interest rate at 5% on Thursday, despite a significant reduction by the U.S. Federal Reserve, which marked its first rate cut since the start of the coronavirus pandemic over four years ago.

This decision was largely anticipated due to persistent inflation concerns within the bank’s monetary policy committee, particularly regarding high inflation in the key services sector, which represents approximately 80% of the British economy. Recent data revealed that overall inflation in the U.K. remained steady at an annual rate of 2.2% in August, exceeding the bank’s target.

Meeting minutes revealed that eight out of nine committee members voted to keep the rates unchanged, with one member supporting a quarter-point decrease.

Bank Governor Andrew Bailey commented, “The economy has been evolving broadly as we expected. If that continues, we should be able to reduce rates gradually over time.” He emphasized the importance of maintaining low inflation, advising caution to avoid rapid or excessive rate cuts.

Following its first rate cut since the pandemic last month, the Bank of England is anticipated to lower borrowing costs further at its next meeting in November, particularly as it will have access to the government’s budget details on October 30.

On Wednesday, the Federal Reserve reduced its main interest rate by half a percentage point to around 4.8%, down from a two-decade high of 5.3% that had been in place for 14 months. The Fed also indicated potential additional cuts in the coming months.

During the pandemic, central banks globally significantly increased borrowing costs from near-zero levels due to rising prices, initially driven by supply chain disruptions and later exacerbated by Russia’s full-scale invasion of Ukraine, which surged energy costs. As inflation rates have recently fallen from multi-decade highs, central banks have begun to lower interest rates.

The Bank of England is expected to follow suit with further rate reductions at its November meeting, influenced by the forthcoming budget details. The new Labour government has projected a £22 billion ($29 billion) gap in public finances, suggesting potential tax hikes and spending cuts, which could impact the near-term economic outlook and exert downward pressure on inflation.

Luke Bartholomew, deputy chief economist at abrdn (formerly Aberdeen Asset Management), noted that the Bank of England will need to factor in any fiscal changes in its upcoming forecasts, which could pave the way for more significant rate cuts in the future.