"The market for UK rates has been swept up recently in a wave of euphoria over interest cuts coming sooner than previously expected."
- David Goebel, Evelyn Partners
The Bank of England's Monetary Policy Committee has voted 6-3 to maintain Bank Rate at 5.25%.
The latest ONS figures, published yesterday, show that monthly GDP fell by 0.3% in October, following growth of 0.2% in September.
As a result, many industry experts said the Bank of England could reduce rates sooner rather than later, with some calling for a rate cut as early as Q1 2024.
Despite this, three members of the Monetary Policy Committee (MPC) voted to increase Bank Rate by 0.25%, to 5.5%, at the latest meeting, with the minutes stating that "key indicators of UK inflation persistence remain elevated". Inflation dropped to a two-year low of 4.6% in October, but remains above the Bank's 2% target.
The Committee said that "monetary policy is likely to need to be restrictive for an extended period of time", adding that "further tightening in monetary policy would be required if there were evidence of more persistent inflationary pressures".
David Goebel, associate director of investment strategy at Evelyn Partners, commented: "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: 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, contrasting notably with last night’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.
"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."
Paresh Raja, CEO of Market Financial Solutions said: “It’s almost two years to the day since the Bank of England began its rate hiking cycle, but today’s decision to maintain rates for a third consecutive time is as sure an indicator as any that it has now peaked. It remains very hard to predict where the base rate will sit in six or 12 months’ time. For now, though, the property market can only benefit from it holding flat – buyers can adapt to the higher rate environment, with the stability allowing them to properly assess how much they can or want to borrow.
“The house price indices are showing green shoots of recovery, meaning property investors can head into the festive period with a cautious sense of optimism – even if a rate cut won’t be under their Christmas tree this year, many expect the base rate to fall next year. However, as always, lenders and brokers must stay on the ball, offering flexibility and certainty in the here and now to help people invest in the property market with confidence in 2024.”
Jeremy Batstone-Carr, European strategist at Raymond James Investment Services, commented: “Despite easing inflation pressures, the Bank of England’s decision to hold the base rate at 5.25% shows that the reduction in inflationary pressures remains too slow for the Bank’s liking.
“This is the third successive policy meeting resulting in a standstill base rate, as the Bank continues to await sustained drops in inflation. The Monetary Policy Committee (MPC) may enact a change in course come 2024, though the lagged impact of earlier rate hikes will still be making their way through the economy, likely leading to flatlined activity for most of the new year before a partial upturn.
“Today’s decision comes in advance of next week’s CPI data, which will paint a clearer picture of the impact of inflation on the nation. For now, we remain at the peak of the rate hiking cycle.”
Mark Harris, chief executive of mortgage broker SPF Private Clients, added: "It comes as no surprise that the Bank of England has held interest rates at 5.25% for the third consecutive meeting. Weak GDP figures has increased the possibility that the next move in rates will be downwards and that could come sooner than many predicted.
"We expect base rate to be heading towards 4% by the end of 2024, assuming inflation also continues to move towards its 2% target. This would necessitate around three or four interest rate cuts next year – which would be welcome news for borrowers who are struggling with affordability."
