Please see the below update from Evelyn Partners Investment Strategy team on today’s Bank of England MPC decision to continue to hold interest rates at 5.25%:
What happened?
The Bank of England (BoE) held the base rate at 5.25% at their meeting today. This was consistent with market expectations and marks the fourth consecutive meeting where rates have been held at this level.
Interestingly, the committee vote was split three ways, with two members voting for a hike, six voting to hold, and Swati Dhingra voting for a 25 basis point cut.
What does it mean?
As expected, the BoE held interest rates at 5.25%. Markets are now focused on when the Bank will cut interest rates and how far they will go. And perhaps Swati Dhingra’s vote to cut the base rate signals that the tide is set to turn. This was the first vote for a cut since the pandemic started almost four years ago. Although clearly this will continue to depend on the incoming data, which has been favourable since the Monetary Policy Committee (MPC) last met in December.
December CPI came in at 4.0% year-on-year, which was well below the Bank’s forecast of 4.6%. The headline figure was helped by services inflation, which was 0.5% percentage points below the Bank’s November forecast of 6.9% year-on-year. Similarly, the latest wage data shows further deceleration. The direction of travel seems encouraging, so much so, that the consensus forecast is that CPI will be 2.1% by the second quarter of this year.
The guidance published today by the MPC provided more hints on how they see the economic outlook. Compared to December’s guidance, the MPC dropped the language mentioning the risk of further interest rate tightening, signalling they are less concerned about inflation remaining stubbornly high. We also received the Bank’s latest forecasts. It expects GDP growth of 0.25% in 2024 and 0.75% in 2025. Similar to the consensus view provided in the Bloomberg survey of economists, the Bank sees inflation decelerating to 2% in Q2 2024, before it picks up again in the second half of the year.
This should give the Bank the ammunition it needs to cut rates around the middle of the year. Money markets are split on whether the base rate will be cut in May, but they have more conviction that we will see at least one cut by June. They are also pricing 100 basis points of cuts by the end of 2024.
Bottom Line
The BoE held interest rates at 5.25%. We expect to see the first rate cut around the middle of the year as inflation decelerates to the 2% mark.
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Andrew Lloyd DipPFS
01/02/2024