Why Aren’t UK Interest Rates Falling as Inflation Tumbles?

With UK inflation now within reach of the Bank of England’s 2% target, homeowners struggling under the highest mortgage costs in four decades may be wondering why the bank hasn’t begun to lower its key interest rate. The answer lies in the pent-up forces unleashed in the economy by coronavirus lockdowns and their complex aftermath. After failing to predict the post-pandemic inflationary surge, bank officials are anxious not to repeat the mistake by cutting rates too early.

It eased gradually to a 2 1/2-year low of 3.4% in February and is expected to dip below the 2% target in April, as global supply chain shocks and big jumps in energy and food prices work their way out of the system. However, the BOE is unsure whether trends in underlying price pressures will allow it to keep inflation at its target on a sustainable basis. There’s a good chance that inflation will pick up again in the second half of the year due to so-called second-round effects.