Please see below article received this afternoon from Evelyn Partners, which reports on the Bank of England’s holding of the base rate at 5.25%.
What happened?
The Bank of England held the base rate at 5.25% at their meeting today. This ends the run of 14 consecutive interest rate increases.
The committee vote was split, with 5-4 members voting in favour of maintaining interest rates.
What does it mean?
Going into today’s meeting, money markets were split 50:50 on whether the Bank of England would raise interest rates. In the end the MPC voted to hold the base rate at 5.25%. Notably, the Bank also said that policy must be restrictive for ‘sufficiently long’, indicating that interest rates will be held higher for longer.
The decision follows some good progress on the inflation front over recent months. Annual headline CPI inflation reached 11.1% in October last year, but it has since fallen by over 4 percentage points. August’s data saw headline inflation surprise on the downside, printing 6.7% year-on-year (vs the consensus expectation of 7.0%). The Prime Minister’s pledge to halve inflation this year, from 10.1% in January to approximately 5% in December, looks to be on track; economists expect inflation to average 4.5% in the fourth quarter of this year.
A key threat, however, comes from the energy sector. The price of oil has increased in recent months as Saudi Arabia and Russia extended voluntary supply cuts to the end of this year. This comes on top of cuts agreed by OPEC+, a group of oil exporters, to the end of 2024. Higher oil prices typically take around one-month to feed through to petrol prices, so we can expect to see higher prices in the coming weeks and months. Another lingering source of inflation in the UK comes from rents, which have yet to peak. Having said that, we still expect inflation to ease in Q4; lower energy costs following the October change to the Ofgem price cap will help households across the country.
In the absence of further shocks, it looks like the BoE is now at, or very close to, the end of its hiking cycle. Attention will now turn to rate cuts, although markets are only pricing one 25 bps cut by the middle of 2024. This is consistent with our expectation that the Bank will keep policy tight through 2024 as they continue to fight inflation.
A continuation of its restrictive policy is supported by the empirical evidence. A recent paper by International Monetary Fund analysed over 100 inflation shock episodes in 56 countries since the 1970. It finds that ‘Countries that resolved inflation implemented restrictive policies more consistently over time’. The BoE and other CBs will be well aware of these findings and will not want to repeat the mistakes of their predecessors by easing policy too early.
In response to the decision, the pound sold-off, hitting its lowest level in six months. While UK equities rallied on the news.
Bottom Line
A close vote saw the Bank of England decide to hold the base rate at 5.25%. We are now at, or very close to, the end of the hiking cycle, but we expect monetary policy to remain restrictive for the foreseeable future.
Please check in again with us shortly for further relevant content and market news.
Chloe
21/09/2023