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Bank of England surprises markets and keeps interest rates on hold

Interest rates on hold

The markets, as they often do, got it wrong. Many traders will be left scratching their heads at Thursday’s decision.

Though Threadneedle Street was unequivocal that rate rises are coming in the months ahead in its minutes, for now it has erred on the side of caution – despite the fact that it now expects inflation to peak at 5% next April, “materially higher than expected in the August report”.

The Bank of England said “it will be necessary over coming months to increase Bank Rate in order to return CPI inflation sustainably to the 2% target.”

So it’s black and white that rate rises are around the corner.

However, it stated that “near-term uncertainties are, for now at least, more important than containing inflation”.

The near-term uncertainties the Bank is worried about are “the outlook for the labour market, and the extent to which domestic cost and price pressures persist into the medium term.”

Essentially, the Bank went to the brink, looked into the abyss, and then stepped back. The sheer extent of the economic chaos caused by the pandemic has created an unprecedented caution on the Monetary Policy Committee.

Even if rates had been raised, the rise would almost certainly have been negligible so savers wouldn’t have been hanging out the bunting.

For well over a decade, since the Global Financial Crisis, savers have been under siege and even though the Bank has made it crystal clear rates will be going up soon enough, there’s a chance many of us will not see the historical interest rate average again in our lifetimes.

For anyone keen to keep their returns real, there are few options other than to move up the risk curve.

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