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Bank of England keeps rates on hold at 5.25%

The Bank of England left rates unchanged at 5.25% which was as expected however anyone who thought there might be a dovish tilt to the decision would have been disappointed with 6 holds and 3 votes for a 25bps rate hike, from Catherine Mann, Megan Greene, and Jonathan Haskel

The central bank also revised its inflation forecast for 2024 higher by 75bps to 3.25%, while nudging the forecast for 2023 down by 25bps to 4.75%. The growth forecasts were disappointing with 2023 left unchanged at 0.5%, while 2024 was downgraded to 0% from 0.5%.

On the inflation forecast it looks like good news for the government in that we are on course for inflation to halve by the end of the year, although it won’t be because of anything the politicians have done but merely a consequence of the natural evolution of slowing prices and a slowing economy.

Despite the bleak outlook it was made clear that interest rates were likely to remain higher for longer and that there was no consideration given to rate cuts. Policy would need to remain restrictive suggesting that the MPC believes that inflation is the bigger enemy for the moment, and rate cuts would run counter to that outcome as they would weaken sterling.

Governor Bailey was at pains to point out that services inflation remained high and that while wage growth was higher, the MPC believed it was below the 7.8% average in the most recent ONS numbers, trending at around 7%. That said inflation risks remained skewed to the upside, with the bank saying they expect annual pay settlement growth to slow to between 6% to 6.5%.  The bigger challenge won’t be getting inflation down, but will be in returning it to the 2% target, given that the neutral rate could be closer to 3%.

The pound edged higher against the US dollar, while UK 10-year gilt yields slid to 3-week lows on the back of today’s decision with the next focus expected to be on the October inflation numbers, which are a week before the Autumn Statement. It is becoming ever clearer that the Bank of England is done when it comes to further rate hikes, and that the next move is likely to be a cut, although when that happens is anyone’s guess.

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