Bank of England holds tight

02 November 2023

Please note: The article does not constitute advice or any form of investment recommendation. All numbers quoted were sourced from Bloomberg data as at Thursday 2 November 2023. Past performance is never a guarantee of future performance.

The Bank of England (BoE) has voted to keep interest rates on hold, at 5.25%.  

For the second consecutive meeting, members of the Monetary Policy Committee (MPC) opted against re-starting their recent hiking cycle. They also failed to see a case for cutting rates.  In the end, the vote to hold the base rate steady was passed by a majority of 6-3. 

Hardly a surprise

Clouds of uncertainty continue to overshadow the UK economy, leaving the MPC with very little room to manoeuvre.  Hiking too aggressively could trigger a recession, while cutting too early could re-ignite the inflation fire.  

As the MPC meeting minutes stated: “Given the significant increase in Bank Rate since the start of this tightening cycle, the current monetary policy stance was restrictive. The decision whether to increase or to maintain Bank Rate at this meeting was again finely balanced between the risks of not tightening policy enough when underlying inflationary pressures could prove more persistent, and the risks of tightening policy too much given the impact of policy that was still to come through.1

Peer pressures 

Interestingly, the BoE is now moving in lockstep with its peers the European Central Bank (ECB), and the US Federal Reserve. Despite contrasting domestic fortunes, the three central banks have independently voted to ease off their recent rate rising efforts (for now). 

Last week, the ECB decided to keep its own rate on hold at 4%, with subsequent economic data suggesting the decision was vindicated. Eurozone year-on-year inflation fell to 2.9% in October, a sharper drop than some expected, and this two-year low points to the worst of the bloc’s inflation struggles being over.  

Likewise, the Fed has decided to keep its benchmark rate range of 5.25-5.5% (a 22-year high). While the US economy remains in robust shape, and has so far avoided the recession that many anticipated in 2023, US policymakers continue to walk the fine line between economic stimulus and strangulation. Scrutiny of Fed decision-making is likely to rise next year, as the race to the White House adds another layer of short-term uncertainty for investors.

Global curveballs? 

The BoE’s second consecutive rate pause will be welcome news for homeowners, businesses and borrowers but the inflation battle isn’t over. Having been slow initially to counter soaring price pressures, complacency remains a real fear for central banks in the tail-end of the fight. 

For the MPC, part of the rationale for holding rates in November, is based on waiting to see if the full effects of earlier hikes have yet filtered through to the UK economy. For now, it’s a case of wait-and-see. 

Unfortunately, the impact of geopolitical conflicts poses a fresh cohort of ‘unknowns’ for policy makers to contend with. If the conflict in the Middle East were to spread, then the subsequent rising oil prices (due to supply interruption) could re-stoke the inflation fire. Similarly, the ongoing Ukraine-Russia war could boost energy prices once again if Europe were to have a particularly cold winter. In this scenario, interest rate rises might be back on the cards as a counter measure, although a sharp decline in economic activity might do the job for the BoE.

Where next for the UK? 

As we’ll cover in our soon-to-launch ‘Outlook 2024’ report, the UK faces a number of economic headwinds in the coming months, in addition to a looming General Election. By holding interest rates steady in November, the BoE is acknowledging the challenges at play. 

For the British public, the reality of a ‘higher for longer’ interest rate environment is hitting home. On today’s evidence, UK rates could conceivably flatline for a large part of 2024, before beginning their sharp descent towards the end of the year.  

As captured in the MPC meeting minutes: “CPI inflation remains well above the 2% target, but is expected to continue to fall sharply, to 4¾% in 2023 Q4, 4½% in 2024 Q1 and 3¾% in 2024 Q2. This decline is expected to be accounted for by lower energy, core goods and food price inflation and, beyond January, by some fall in services inflation.

In the MPC’s latest most likely, or modal, projection conditioned on the market-implied path for Bank Rate, CPI inflation returns to the 2% target by the end of 2025. It then falls below the target thereafter, as an increasing degree of economic slack reduces domestic inflationary pressures2.” 

Meanwhile for investors, the message is repetitive but important: stay invested and stay diversified.

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