Please see the below article from Eveleyn Partners detailing their thoughts on today’s Bank of England MPC decision to continue to hold interest rates at 5.25%. Received this afternoon 14/12/2023.
What happened?
The Bank of England (BoE) held the base rate at 5.25% at their meeting today. This was the third consecutive meeting at which they have held rates at this level and was in line with market expectations.
The committee was split in its vote, as it was in November, 6-3, with the three external members of the committee continuing to prefer another 25bps increase.
What does it mean?
Today’s decision by the Bank of England will not come as a surprise to markets. What is of interest is the tone and rhetoric of the statement today. The Bank maintained its hawkish stance, that rates would need to be “sufficiently restrictive for sufficiently long” and leaving the door open for further tightening should inflationary pressures persist. That contrasted with yesterday’s FOMC statement which took a more dovish tone.
The economic backdrop to today’s meeting remains difficult. The economic data has been mixed since their November meeting, and the while progress on inflation has been made, uncertainty remains around the outlook. CPI inflation has fallen by 2.1% to 4.6%, undershooting the committee’s estimate of 4.8%. In terms of real GDP, October figures showed a 0.3% contraction, which leaves the economy set to undershoot the Banks 0.1% estimate for growth in Q4.
The fiscal backdrop has also changed, with the Chancellor easing policy in the Autumn statement and government suggesting there might be more to come in the Spring Budget, potentially adding inflationary pressure.
After the November MPC meeting, the first cut in interest rates had been priced in for August 2024. Since then, markets have grown increasingly optimistic about the timing of rate cuts – expected in May shortly before today’s meeting and remained little changed immediately after.
Bottom Line
We think the UK economy faces more inflationary challenges than some of its global peers, in particular the US, and would suggest the market for UK rates has been swept up recently in a wave of euphoria over interest cuts coming sooner than previously expected. Our view is that while the direction of travel is correct, there is risk that markets are disappointed when cuts do not come through as quickly as currently priced in.
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Alex Clare
14/12/2023