Yahoo Finance Bank of England set to keep UK interest rates on hold
Monetary Policy Committee expected to vote in favour of a no hike on Thursday
The Bank of England (BoE) is set to keep UK interest rates on hold at 5.25% on Thursday as inflation continues to fall from record highs.
Financial markets indicate a 94% chance of “no change”, with just a 6% possibility of a quarter-point hike from the Monetary Policy Committee (MPC) to 5.5%.
It comes as UK inflation came in at 6.7% in the year to September, unchanged from the previous month, but considerably higher than in other G7 economies. This is also more than three times Threadneedle Street’s 2% target.
“Since the last meeting in September, indicators of economic activity have remained less than impressive, wage growth has eased and hawk Jon Cunliffe has left the committee, with his replacement, Sarah Breeden, appearing likely to side with the doves,” said Matthew Ryan, head of market strategy at global financial services firm Ebury.
“This would suggest no closer than a 6-3 vote in favour of no change. The BoE will probably strike a cautious tone on the growth outlook, and downward revisions to the GDP forecasts for 2023 and 2024 are on the cards.”
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In a note, Barclays (BARC.L) said it sees the UK central bank rate remaining at 5.25% until August 2024, before the first of an expected four 25 basis point cuts.
“We expect that the data-dependent guidance is unlikely to change, with the MPC preserving, at least in theory, the possibility of further hikes in order to prevent expectations of cuts being brought further forward,” said Barclays economist Abbas Khan.
“In terms of the vote split, we expect a 1-6-2 outcome (-25bp/hold/+25bp respectively), with external member Dhingra voting for a cut (which would be the first time a committee member has voted to lower rates in this hiking cycle), and with external members Haskel and Mann voting for a 25bp hike.”
Meanwhile, George Buckley, chief UK and Euro Area Economist at Nomura said: “Rising international bond yields and geopolitical concerns (notwithstanding the potential impact on energy prices of the latter) also suggest against higher rates.
"We think we’ve seen the last of the hiking cycle and expect the next move in rates to be down in Q3 next year.”
Last week, the European Central Bank (ECB) also hit the pause button on its rate-rise programme after previously hiking interest rates to record levels.
The hold at 4% came after a 15-month streak of rises from the ECB, with the bank saying inflation was starting to come down to its target.
Its main refinancing operations rate, which sets weekly borrowing costs for commercial banks, was left unchanged at 4.5%, while the marginal lending facility rate, offering overnight credit to banks, was unmoved at 4.75%.
Inflation across the eurozone has fallen to 4.3% in the year to September, down from 5.2% in August.
ECB president Christine Lagarde said that the fall in inflation was due to improving supply conditions, the pass-through of previous falls in energy prices, and the impact of tighter monetary policy on demand and corporate pricing power.
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Later today the US Federal Reserve is widely expected to follow suit and keep interest rates unchanged in a range of 5.25%-5.50%, the highest in 22 years.
Investors will have their eyes focused on chairman Jerome Powell’s press conference at 6.30pm UK time.
Bets of a 25 basis point rate hike in December currently stand at 27.4%, according to the CME Group’s FedWatch tool.
"[Fed Chair Jerome] Powell wants to play it right down the middle," said Wilmer Stith, bond portfolio manager for Wilmington Trust. "They're well into their tightening cycle, if not done already."
Powell signalled in a speech at the Economic Club of New York earlier this month the central bank could hold rates steady at its next policy meeting. But he also warned that inflation was still too high and more interest rate increases are still possible if the economy stays surprisingly hot.
Ricardo Evangelista, senior analyst at ActivTrades said: “It’s Fed decision day, and the US dollar is hedging higher as investors anticipate the conclusion of the American central bank’s policy meeting later today.”
“Few expect another rate hike, but the event has the potential to be dollar-positive, nevertheless. It all hinges on the message delivered by Jerome Powell; if, as some expect, the Chairman of the Fed puts his emphasis on a higher-for-longer scenario, the dollar is likely to remain supported, especially if Powell also hints at the possibility of one last hike before the end of the current cycle.”
“Against this background, and with geopolitical uncertainty also supporting the greenback, the currency could once again test the yearly maximums touched in early October.”
Watch: How does inflation affect interest rates?
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