Level 1 — Absolute Beginner
The Bank of England is the main bank in the United Kingdom. It decides the interest rate.
On 17 September, the bank did not change the rate. The rate stayed at 3.75 per cent.
Nine people voted. Six said keep the rate. Three said make it higher.
Prices are going up. The bank may raise the rate soon.
- bank
- A place that keeps money safe and lends money to people.
- rate
- A number that shows how much something costs or changes.
- vote
- To choose something in a group decision.
- price
- The amount of money you pay for something.
- higher
- More than before.
- keep
- To not change something.
- money
- Coins and notes that people use to buy things.
- soon
- In a short time from now.
Level 2 — Elementary
The Bank of England decided on 17 September to keep its main interest rate at 3.75 per cent. The interest rate is the cost of borrowing money, so it affects loans, credit cards and home payments across the country.
The decision was not easy. Nine officials sit on the Monetary Policy Committee. Six of them voted to keep the rate where it is. The other three wanted to raise it straight away to 4 per cent.
The reason is inflation. The war involving Iran has pushed up the cost of energy, and higher energy costs make many other things more expensive too. The Bank wants inflation to come back down to its 2 per cent target.
The Bank said it may need to raise rates soon. Financial markets now believe a rise at the November or December meeting is more likely than not.
- interest rate
- The extra amount you pay to borrow money, shown as a percentage.
- borrow
- To take money now and pay it back later.
- loan
- Money that a bank gives you and that you must pay back.
- committee
- A small group of people chosen to make decisions.
- inflation
- A general rise in prices over time.
- energy
- Power such as electricity, gas or oil used to run things.
- target
- A result that someone is trying to achieve.
- markets
- Places where people buy and sell shares, money and other assets.
Level 3 — Intermediate
The Bank of England left its Bank Rate unchanged at 3.75 per cent on 17 September, but the headline masked an unusually divided committee. Six members of the nine-strong Monetary Policy Committee voted to hold, while three broke ranks and backed an immediate quarter-point increase to 4 per cent.
A split of that size is a signal in its own right. Central banks rarely move without first preparing the ground, and a minority of three dissenters is often read by traders as a dress rehearsal for a majority at the next meeting. The Bank reinforced that reading by saying openly that it may need to raise borrowing costs in order to dampen inflationary pressure.
The source of that pressure is the war involving Iran, which has made energy markets volatile. Energy feeds into almost every other price in an economy, from transport to manufacturing to food, so a sustained rise there tends to spread outward over months rather than weeks. The Bank warned that the longer the volatility persists, the greater the effect on inflation and the more likely it becomes that rates must rise to bring inflation back to the 2 per cent target.
Financial markets have taken the hint. Traders now judge it more likely than not that the Bank will vote for an increase at one of its next two policy meetings, in November or December.
- unchanged
- Staying the same as before.
- dissenter
- A person who disagrees with the majority decision.
- central bank
- The national bank that manages a country's money and interest rates.
- volatile
- Likely to change suddenly and unpredictably.
- sustained
- Continuing for a long period without stopping.
- dampen
- To make something weaker or less intense.
- persist
- To continue to exist over time.
- trader
- A person who buys and sells shares, currencies or goods for profit.
Level 4 — Advanced
A decision to do nothing can still be the most informative thing a central bank does all quarter. The Bank of England held Bank Rate at 3.75 per cent on 17 September, yet the interesting number was not the rate but the tally: six votes to hold, three to raise immediately to 4 per cent. Three dissenters on a committee of nine is not a rounding error in the consensus. It is a minority large enough to become a majority with a single defection.
Monetary policy is conducted as much through language as through arithmetic, and the Bank's accompanying communication removed most of the ambiguity. Rather than defending the hold as a considered pause, officials said plainly that rates may need to rise to dampen inflationary pressure, and warned that the longer the current volatility persists, the larger its eventual imprint on prices. That is the vocabulary of preparation rather than patience.
The pressure originates in the energy complex, unsettled by the war involving Iran. Energy occupies an awkward position in any inflation forecast because it is simultaneously a consumer price and an input cost: households feel it directly in heating and fuel, while firms absorb it in transport, manufacturing and distribution before passing a portion onward. The pass-through is slow and uneven, which is precisely what makes it dangerous for a central bank whose mandate is a 2 per cent target. By the time an energy shock is unmistakable in the headline figures, it has usually been travelling through the supply chain for several quarters.
Markets responded by repricing rather than reacting. Traders now assign better-than-even odds to an increase at one of the next two meetings, in November or December. The Bank has thereby achieved something of what it presumably wanted: tighter expected conditions without having tightened anything, and a committee visibly positioned to move the moment the data justify it.
- tally
- A record or count of votes or scores.
- defection
- The act of leaving one side and joining another.
- ambiguity
- The state of having more than one possible meaning.
- imprint
- A lasting mark or effect left by something.
- input cost
- The cost of the materials and services a business needs to produce something.
- pass-through
- The extent to which a cost increase is transferred into final prices.
- mandate
- An official instruction or authority to do something.
- reprice
- To change the price or expected value of something in response to new information.