Bank of England stops hiking

21 September 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 21 September 2023. Past performance is never a guarantee of future performance.

The Bank of England (BoE) has broken with recent tradition by deciding not to increase the base rase at its latest Monetary Policy Committee (MPC) meeting. Despite ongoing inflation challenges, the central bank opted to keep the rate at 5.25%. 

As a result, it closes the chapter on an historic period of interest rate rises, featuring 14 uninterrupted hikes. The decision to take a breather will be welcome news for borrowers, many of whom have felt the pinch as lending costs soared. 

Despite the good news, it’s too early to declare the inflation battle to be over, or to dismiss that worse may yet be to come. The risk of a recession is one of the reasons why the BoE wanted to break the hiking cycle, for fear that the UK economy might not weather further strain. 

Has inflation peaked?  

Possibly, yes. However, it’s too early to say for sure. 

In the run-up to the MPC meeting, UK inflation was reported to have fallen more sharply than many anticipated. Despite global oil prices rising, which are normally a catalyst for inflation, latest data from the Office for National Statistics showed the consumer prices index falling to 6.7%. For context, it was 7.9% in June, since when falling food prices have helped ease the pressure.  

Against this backdrop, the MPC had to weigh up two scenarios – either the battle to tame inflation needed to go on for longer, meaning more rate hikes. Or, there were enough positive signs coming through, coupled with a fear that recession risk was mounting, to suggest the battle was being won. 

In the end, the MPC decided the glass was probably half full, even if it was too early to say so definitively. The decision to keep the rate on hold at 5.25% was passed by a 5-4 vote, which was the tightest margin for a long time. 

Too early to celebrate

While borrowers will feel relieved, the BoE was at pains to stress that the hiking pause was temporary. With inflation at 6.7%, it’s well-above the target of 2%, and doubts remain as to whether efforts to dampen soaring prices have truly worked.  

As the MPC declared in its official statement: “Monetary policy will need to be sufficiently restrictive for sufficiently long to return inflation to the 2% target sustainably in the medium term, in line with the Committee’s remit. Further tightening in monetary policy would be required if there were evidence of more persistent inflationary pressures.1

Where next? 

For investors, a period of uncertainty looms as policymakers weigh-up their options, and assess the impact of their decision-making.

By keeping rates on hold, the BoE has mirrored the US Federal Reserve’s train of thought. Nothing is guaranteed of course, but the two central banks appear to believe their recent rate hikes have paid off.  

If inflation has indeed peaked, and if rates can start to come down – possibly in 2024 – then investors will breathe a sigh of relief.

In the meantime, the message remains: stay invested and stay diversified.  

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