- The Bank of England (BoE) voted to maintain the Bank Rate at 5.25%.
- Inflation has fallen from a peak of 11% in 2022 to 6.7% in September 2023 and is expected to fall further.
- GDP growth expectations were revised lower but upside risks to the inflation outlook were noted.
High enough for long enough
At its November Monetary Policy Committee meeting, the BoE voted to maintain the Bank Rate at 5.25%. The BoE’s Governor Andrew Bailey noted that inflation has fallen, and is expected to fall further this year and next year, while monetary policy is viewed as restrictive. Bailey was also keen to emphasise that there is no room for complacency as inflation remains too high, reiterating that the BoE will keep rates high enough for long enough to make sure inflation falls all the way back to 2%.
The BoE will be watching closely to see if further rate increases are needed, but even if they are not, policymakers believe it is much too early to be thinking about rate cuts. Part of the reason for remaining on hold is that the BoE thinks more than half of the rate hikes in the current cycle are yet to feed through to the economy.
This month’s meeting had a more dovish 6-3 split in favour of remaining on hold as Sarah Breeden, the new deputy governor for financial stability, favoured no hike. Her predecessor, Jon Cunliffe, voted for a 25 basis point rise in September.
Exhibit 1: UK bank rate on hold at 5.25%
Growth expected to be weaker
UK GDP is expected to be weaker than projected in the August Report . Some business surveys are pointing to a slight contraction of output in the fourth quarter but others are less pessimistic. The BoE points out that employment growth is likely to have softened over the second half of 2023, and to a greater extent than projected in the August Report. Falling vacancies and surveys indicating an easing of recruitment difficulties also point to a loosening in the labour market.
Exhibit 2: Bank of England modal GDP forecasts (% year-on-year) were revised significantly higher
Pay growth on the radar but inflation expected to fall
Pay growth has remained high across a range of indicators, although the recent rise in the annual rate of growth of private sector regular average weekly earnings has not been apparent in other series. The BoE noted the uncertainty about the near-term path of pay, but wage growth is nonetheless projected to decline in the coming quarters from these elevated levels.
Twelve-month consumer price index (CPI) inflation fell to 6.7% in September, below expectations in the August Report. This fall was largely due to lower-than-expected core goods price inflation. A further decline in inflation is expected to be accounted for by lower energy, core goods and food price inflation and, beyond January, by some easing in services inflation.
The Monetary Policy Committee continues to judge that the risks to its inflation projection are skewed to the upside. The mean projection for CPI inflation is 2.2% and 1.9% at the two- and three-year horizons, respectively. Conditioned on the alternative assumption of constant interest rates at 5.25%, which is a higher profile than the market expects beyond the second half of 2024, mean CPI inflation would be expected to return to target in two years’ time and fall to 1.6% at the three-year horizon.
Liquidity strategies continue to benefit from the rapid rise in rates over the past couple of years. With the increased conviction that the UK is at peak rates, we believe investors should continue to prioritise a disciplined approach to cash segmentation across both liquidity and ultra-short term cash strategies.