In brief

• The Bank of England (BOE) Monetary Policy Committee (MPC) voted 6-3 to maintain the base rate at 5.25% at its December meeting.


• The MPC maintained its guidance that rates would need to be “sufficiently restrictive for sufficiently long” to curb inflation.
  

This time “there is still some way to go”

The BOE Governor Andrew Bailey mentioned in the statement released alongside the decision that “there is still some way to go” in the fight to curb inflation. This statement follows repeated MPC guidance that rates could be raised again “if there were evidence of more persistent inflationary pressures”. 

The MPC doesn’t seem to be ready to talk about cuts yet, with inflation still running at a pace more than double the BOE’s 2% target. It is worth noting that consumer price index (CPI) inflation is expected to remain near to its current rate around the turn of the year, although services inflation is projected to increase temporarily in January given the base effects from unusually weak price movements at the start of 2023. According to the BOE, the near-term path for CPI inflation is now expected to be somewhat lower than was projected in the November Monetary Policy Report, partially due to recent declines in energy prices. 

Macroeconomic developments

UK GDP was flat in the third quarter of 2023, as expected in November Monetary Policy Report, and fell by 0.3% in October. Based on latest official and survey data, the BOE expects GDP growth to be broadly flat in the fourth quarter and over the coming quarters. The MPC provisionally expects the fiscal measures in the government’s Autumn Statement to increase the level of GDP by around 0.25% over the coming years; however, the inflationary impact is likely to be negligible. 

Wage inflation declines but upside risks remain

The MPC was happy to see annual private sector regular average weekly earnings (AWE) growth decline to 7.3% in the three months to October, which was half a percentage point below the level projected in the November Monetary Policy Report. This fall has brought AWE somewhat more in line with other indicators of pay growth. However, AWE growth above 7% is still a cause for concern. Upside risks to the outlook for wage growth remain, including from the possible effects of the recently announced increase in the National Living Wage. 

Investor implications  

With no increase to the MPC’s deposit rate, sterling cash investors won’t witness an immediate increase in yields from a liquidity fund’s overnight investments. Nevertheless, liquidity strategies continue to benefit from higher reinvestment rates, derived from previous base rate increases. 

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.

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