Bank of England Maintains Rates at 15-Year High, Rules Out Quick Cuts to Support Economy – Reuters

By William Schomberg and Andy Bruce

LONDON – The Bank of England has decided to maintain interest rates at a 15-year high, indicating that cuts are not on the horizon as it seeks to combat the highest inflation levels among major advanced economies.

Despite noting that the economy is nearing a recession and expected to experience minimal growth in the coming years, the Bank affirmed its commitment to keeping borrowing costs elevated.

The Monetary Policy Committee (MPC) voted 6-3 in favor of maintaining the Bank Rate at 5.25%, echoing its September decision after a series of 14 consecutive increases, a move anticipated by economists in a recent poll.

The Bank stated, "The MPC’s latest projections indicate that monetary policy is likely to need to be restrictive for an extended period."

The UK economy has already felt the pressure of rising interest rates implemented between December 2021 and August this year, with approximately half of the impact yet to fully materialize.

Governor Andrew Bailey cautioned against complacency, emphasizing that inflation remains excessively high and reaffirming the Bank’s objective to bring it back down to the 2% target. He stated, "We will be watching closely to see if further increases in interest rates are needed. But even if they are not, it is much too early to consider rate cuts."

In light of the Bank’s somber economic outlook, British government bond yields fell significantly as investors anticipated that future rate adjustments could trend downward.

Bailey emphasized that the Bank will maintain a restrictive monetary policy only as long as necessary to eliminate inflation from the economy.

Similarly, the European Central Bank and the U.S. Federal Reserve have opted to keep rates steady in recent days while evaluating the effects of their aggressive rate hike strategies on the prevailing inflation crisis.

Economist Ellie Henderson from Investec noted that central banks are cautious about providing guidance, avoiding previous missteps during the early stages of inflation’s rise. She pointed out, "In an extremely uncertain world, there is little to gain from central banks prematurely declaring the end of hikes."

Bailey acknowledged potential risks from the conflict in the Middle East that could drive energy prices higher, affecting inflation, although this impact has yet to materialize.

Among the MPC members, Megan Greene, Jonathan Haskel, and Catherine Mann supported raising rates to 5.5%, while Sarah Breeden voted to hold rates steady in her first meeting after replacing Jon Cunliffe.

FLAT-LINING ECONOMY

While inflation has decreased from 11.1%—its highest level since the 1980s—to 6.7% in the latest figures, it remains significantly above the Bank’s target. The central bank anticipates zero growth in the UK economy from July to September, followed by a modest expansion of just 0.1% in the fourth quarter. Predictions indicate no growth for 2024 and an increase of merely 0.25% in 2025.

Despite these forecasts, the Bank expects inflation to return to the 2% target by late 2025, approximately six months later than previously estimated.

Markets are betting that the Bank will maintain the current interest rate until at least August of next year, when potential reductions could begin. The Bank’s forecasts do not suggest a challenge to these expectations.

Economists are divided on the timing of potential rate decreases. Henderson from Investec anticipates a drop in the second quarter of 2024, while JP Morgan’s Allan Monks believes rates will remain unchanged throughout the next year.

The Bank projected that inflation rates will likely decrease to 4.8% in October, nearly two points lower than September, attributed to the diminishing effects of the previous year’s gas price increases.

It continues to monitor strong wage growth closely, which could sustain inflationary pressures. The Bank highlighted "increasing uncertainties" surrounding official labor market data, which has been difficult to assess due to low survey responses, but jobs growth is expected to be weaker than previously estimated. It also foresees a moderation in wage growth.

One aspect of the BoE’s otherwise bleak economic assessment is likely to please Prime Minister Rishi Sunak, as it forecasts inflation of 4.6% in the fourth quarter of 2023, aligning with Sunak’s commitment to managing price growth ahead of the anticipated 2024 election.