 "Bank of England holds rates with warning of 'way to go' on inflation")
By Tom Rees
The Bank of England kept interest rates at a 15-year high, sticking with its message that borrowing costs will remain elevated for some time despite growing bets on a wave of cuts in 2024.
The UK central bank’s decision contrasted with the US Federal Reserve’s admission last night that reductions were on the agenda, reiterating that BOE policy will be “sufficiently restrictive for sufficiently long” to curb inflation. BOE policy makers split along the same lines as in their previous meeting in November, with three still supporting a hike.
Governor Andrew Bailey said in a statement released alongside the decision that “there is still some way to go” in the fight to control inflation. The MPC repeated its guidance that it could hike again “if there were evidence of more persistent inflationary pressures,” with price growth still more than double the 2% target.
Their conclusion is the latest indication that the BOE will trail the Fed and European Central Bank in easing off on its monetary tightening. Britain still has the strongest inflation rate in the Group of Seven nations, with a smaller workforce than at the start of the pandemic and wage rises fanning upward pressure on prices.
“Markets were starting to smell a global pivot by central banks after the Fed shifted decidedly dovish last night,” said Matthew Landon, global market strategist at JPMorgan Private Bank. “The Bank of England didn’t quite follow suit.”
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Markets priced in 1.25 percentage points of cuts in 2024 on Thursday for the first time, with the move to easier policy expected to begin in May. That shift was accelerated by a more dovish stance from Fed policymakers who projected an end to its rate hikes and more aggressive cuts in 2024.
The pound extended gains against the US dollar while gilt yields trimmed an earlier decline. Traders pared their bets on BOE rate cuts next year which had been fueled by the Fed’s dovish pivot late Wednesday. Investors now see around 118 basis points of monetary easing in the UK in 2024 compared to as much as 127 basis points before the BOE’s announcement.
The Monetary Policy Committee voted 6-3 to keep its key policy rate at 5.25% for the third consecutive meeting, according to minutes of the decision released Thursday.
“We’ve come a long way this year, and successive rate increases have helped bring inflation down from over 10% in January to 4.6% in October,” Bailey said. “But there is still some way to go. We’ll continue to watch the data closely, and take the decisions necessary to get inflation all the way back to 2%.”
Economists believe the UK economy is flirting with a recession as the cost-of-living crisis and aggressive monetary tightening by the BOE take their toll, a bleak prospect for Prime Minister Rishi Sunak ahead of a general election expected to be held next year. The BOE now expects GDP to be flat in the fourth quarter of 2023 after the economy shrank in October, a downward revision from the 0.1% quarterly growth expected in its November forecasts.
“Yesterday’s worse than expected GDP result has to be setting alarm bells ringing among economists and policymakers,” said Martin McTague, chair of the Federation of Small Business. “The MPC needs to be responsive to indications that economic damage is setting in.”
Chancellor of the Exchequer Jeremy Hunt said in a letter to Bailey that the bank continued to have his “full support” in its fight against inflation. The central bank said that Hunt’s Autumn Statement — which included a tax cut for workers and permanent full expensing for businesses — will boost the level of GDP by 0.25% over the coming years but also lift supply.
“We have turned a corner in our fight against inflation and real wages are rising, but we must keep driving inflation out of the economy to reach our 2% target,” Hunt said in a statement after the decision. “By cutting taxes for hard working people and businesses, and helping people into work, we are forecast to deliver the largest boost to potential GDP on record.”
While Bailey has previously insisted that it was too early to discuss a loosening in policy, investors ramped up bets on interest rate cuts in the run-up to Thursday’s meeting. Speculation over a pivot has built after sharp falls in inflation and growing evidence that the most aggressive rate-hiking cycle in decades is weighing on the economy.
The members calling for higher rates were Catherine Mann, Megan Greene and Jonathan Haskel.
The rate-setters said the near-term path for inflation was “somewhat lower than projected” in November and noted “downside news” in private sector wage growth. However, it warned against over-interpreting the wage data and said there were upside risks for pay, including the planned increase in the National Living Wage.
It also cautioned that it is “too early to conclude that services price inflation and pay growth were on a firmly downward path.” Policymakers are concerned about a tight labor market fueling persistent inflation with annual wage growth still running at above 7%.
The European Central Bank is due to release its own monetary policy decision at 1:15 p.m. London time. Markets see a first ECB cut as early as the spring.