Yahoo Finance Bank of England holds interest rates amid expectations of cuts in 2024
The Bank of England (BoE) has left UK interest rates on hold at a 15-year high of 5.25% in its final meeting of the year.
The monetary policy committee (MPC) voted by a majority of six to three to keep the Bank rate steady for the third time in a row as it tries to bring inflation lower.
Six members chose to leave rates as they are — governor Andrew Bailey, Sarah Breeden, Ben Broadbent, Swati Dhingra, Huw Pill and Dave Ramsden. Megan Greene, Jonathan Haskel and Catherine Mann voted against the hold, preferring an increase of 0.25 percentage points to 5.5%.
The minutes of this month’s meeting stated that the Bank’s policymakers would tighten policy further if they saw signs of “more persistent inflationary pressures.”
It said: "Monetary policy will need to be sufficiently restrictive for sufficiently long to return inflation to the 2% target sustainably in the medium term, in line with the Committee’s remit.
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"As illustrated by the November Monetary Policy Report projections, the Committee continues to judge that monetary policy is likely to need to be restrictive for an extended period of time. Further tightening in monetary policy would be required if there were evidence of more persistent inflationary pressures."
Money markets are now predicting that Threadneedle Street will reduce interest rates by five quarter-point cuts next year, down from the current levels to 4%.
They also predict that Threadneedle Street will begin reducing borrowing costs by May at the latest, having previously forecast it would start by June.
However, Goldman Sachs (GS) said on Thursday that the base rate will face an even sharper cut next year, down to at least 3.75% by the end of 2024.
“Momentum in UK economic activity has stalled, with weakness across most sectors including consumer-oriented services — a pivotal driver of growth. We have also seen a noteworthy deceleration in wage pressures," Gurpreet Gill, macro strategist global fixed income at Goldman Sachs Asset Management, said.
“The confluence of sluggish growth momentum and abating underlying inflation pressures mean we expect the Bank of England to initiate rate cuts from May 2024. We expect further easing throughout the year, culminating in a Bank Rate of 3.75% by the end of 2024.”
The BoE hiked interest rates in 14 consecutive meetings until they peaked at 5.25% in August. The MPC then decided to pause the hike-cycle, also leaving rates unchanged in the September and November meetings.
As well as UK inflation still being more than double the Bank’s 2% target, at 4.6% in October, its biggest concern now is wage growth, which is currently at 7.3%, while services inflation is at 6.6%, and appears to be behind some of the dissent on the MPC.
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Andrew Bailey said on Thursday: "We’ve come a long way this year, and successive rate increases have helped bring inflation down from over 10% in January to 4.6% in October. But there is still some way to go.
"We’ll continue to watch the data closely and take the decisions necessary to get inflation all the way back to 2%.
Julian Jessop, economics fellow at the Institute of Economic Affairs (IEA) said there was a clear risk that the Bank will keep rates higher for longer than is either necessary or desirable. Almost every leading indicator of inflation is pointing firmly downwards, including money and credit, producer prices, and global energy costs.
"The MPC’s fears about a ‘wage-price spiral’ are also overdone. In reality, wages are only catching up with prices, and there is already evidence that pay pressures are easing.
"Unfortunately, the Bank currently lacks the confidence or the credibility to cut interest rates until it is certain that inflation is back under control. By then, it may be too late to prevent a prolonged slump. Hopefully the markets will force the Bank's hand. Indeed, bond yields and mortgage costs are already falling as investors anticipate rate cuts from other central banks, led by the US Fed."
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The announcement comes hot on the heels of a decision by the US Federal Reserve to hold rates steady. Last night it signalled that rate rises were coming to an end.
The Fed sees 75 basis points of rate cuts coming in 2024, which accounts for one more rate cut than had been projected in September.
"At the press conference Powell tried to give the impression that the Fed retained the option to hike rates again, however this message is rather undermined by the fact that the FOMC cut their dot forecasts as much as they did," Michael Hewson, chief market analyst at CMC Markets UK, said.
"The admission that the FOMC discussed rate cuts was also noteworthy. If 'higher for longer' wasn’t dead before last night, it certainly is now."
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Lindsay James, investment strategist at Quilter Investors, said: "The Bank faces a considerably more difficult economic outlook than the Fed, with inflation still more than double its 2% target and GDP missing estimates and contracting 0.3% month-over-month in October, heightening the risk of a recession.
"Two years on from its first rate hike of this cycle, however, it is clear the Bank’s efforts are starting to take real effect and calls for cuts will only grow stronger should the economy continue to weaken."
Later on Thursday, the European Central Bank (ECB) is also expected to leave its deposit rate unchanged at 4.0%, while its inflation expectations could be revised down in the latest macro forecasts drawn up by its staff.
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