A member of the public walks in heavy rain near the Bank of England in May 2023.
Dan Kidwood | Getty Images News | Good pictures
LONDON – The Bank of England left interest rates unchanged on Thursday, but said monetary policy would remain tight “for an extended period”.
The Monetary Policy Committee voted 6-3 in favor of keeping the key bank rate at 5.25%, with three members favoring another 25-basis-point hike to 5.5%.
Earlier this morning, markets had an 89% chance of a second straight hike, according to LSEG data, after the bank completed 14 straight hikes in September.
“The MPC’s latest projections indicate that monetary policy will need to be restrained over the longer term. And if there is evidence of sustained inflationary pressures, further tightening of monetary policy will be required,” the MPC said in its Thursday statement.
Inflation has weakened to 6.7% since the MPC’s last forecast in October, but remains above the central bank’s 2% target. Meanwhile, economic activity has softened considerably and the labor market has shown signs of easing.
Bank of England Governor Andrew Bailey said despite the improvement in inflation, there was “absolutely no room for complacency” and it was “still too high”.
“We will keep interest rates low enough over the long term to ensure we return inflation to the 2% target. We will watch closely whether further increases in interest rates are necessary, but even if they are not, it is too early to think about rate cuts,” Bailey said.
In an accompanying monetary policy statement, the committee on Thursday noted that inflation had fallen below expectations in its August findings. The bank now expects the consumer price index to average 4.75% in the fourth quarter of 2023, before easing to 4.5% in the first quarter of next year and 3.75% in the second quarter of 2024.
UK GDP is expected to be flat in the third quarter of 2023, indicating a weaker performance than the MPC had forecast in August. GDP is now expected to grow just 0.1% in the fourth quarter, weaker than expected in August.
“Since the MPC’s previous decision, there has been little news on key indicators of UK inflation holding steady. Some of the impact of tighter monetary policy on the labor market and signs of the pace of the real economy generally remain,” the MPC said in its report.
It said monetary policy “must be sufficiently restrained for a sufficiently long period of time” to return inflation to the 2% target in a sustainable manner.
‘We are now at peak rates’
Given these prevailing dynamics, many strategists say the bank is now done hiking. Emma Mogford, manager of Premier Miton Monthly Income Fund, said confidently: “We’re at peak rates now.”
“The rapid increase in interest rates over the past year will continue to dampen demand for goods and services, so the Bank of England expects inflation to be around 2% in two years,” he said in an email.
“If inflation can ease while the economy remains resilient, that will be good for UK stocks.”
This was echoed by Sam Ziff, head of global FX strategy at JP Morgan Private Bank, who said the MPC would sit on “Table Mountain” for a while, but the next move would be to cut rates.
Suren Thiru, director of economics at ICAEW, said Thursday’s decision and the increase in MPC members’ voting were “further evidence that rates have now peaked”, compared to September’s narrow 5-4 split.
“Even though this interest rate hike cycle is over, the lagged impact of previous tightening means that a lasting squeeze on mortgage holders, businesses and the broader economy is still far from over,” Mr added by email.
“As the Bank of England expects the economy to weaken further, the case for an interest rate cut is likely to increase.”
Economy ‘on a knife edge’
Separately, Chancellor of the Exchequer Jeremy Hunt said the UK was “more resilient than many expected, but the best way to deliver prosperity is sustainable growth”.
“The Autumn Statement will set out how we will boost economic growth by unlocking private investment, putting more Britons back into work and delivering a more productive British government,” he added.
The US Federal Reserve on Wednesday kept rates unchanged and upgraded its economic growth estimate, with Chairman Jerome Powell stressing that the Federal Open Market Committee was not discussing rate cuts at this stage.
However, markets interpreted his comments as pessimistic and all but concluded that the Fed had ended its hiking cycle, which triggered a significant drop in short-term US Treasury yields, which spread to Europe and the UK and spurred equity markets. Forward.
The two-year UK gilt yield fell to its lowest level since June ahead of the Bank of England’s close on Thursday. Yields move inversely with prices.
Michael Field, senior equity strategist at Morningstar, said the bank’s decision would come as a “small relief” to markets, but any positivity was “lost in the euphoria” of the news state.
“The UK economy, like much of Europe, is on a knife edge. Barely growing, but still experiencing high inflation. Labor markets are tight, but consumers’ pocketbooks are not keeping up with inflation. From here we can hope. Inflation continues to fall at pace, making it easier for the Bank to start cutting rates,” he said in an email on Thursday.
