BoE hits pause on hikes for now
09/21/2023
Olivia Maguire
In Brief
- The Bank of England (BoE) maintained Bank Rate at 5.25% bringing to an end its run of 14 consecutive rate increases.
- A weaker growth outlook alongside signs of loosening in the labour market and lower than anticipated inflation warranted the majority of the committee to vote for an immediate pause.
- While policy needs to remain sufficiently restrictive for long enough, continued higher wage growth and recovering consumer confidence could require further tightening if higher inflation persists.
Finely balanced split decision
At its September 2023 meeting, the Monetary Policy Committee (MPC) maintained Bank Rate at 5.25% (Exhibit 1) in a split 5-4 decision, while unanimously deciding to reduce the stock of UK government bond purchases by £100 billion over the next twelve months. In the latest inflation report, headline CPI (Consumer Price Index) had fallen to 6.7% year on year in August, down from a peak of 11.1% in October 2022. GDP growth in July fell 0.5% month over month, and consistent with softer flash PMIs in August, the growth outlook is predicted to be weaker than expected over the second half of 2023. Meanwhile a survey of the Bank’s Agents reported a fall in hiring and a clear decrease in wage growth – despite continued strength in Average Weekly Earnings data which had increased 8.1% in the three months to July. In consideration of this backdrop, five MPC members voted in favour of a pause at 5.25% to allow lagged effects from past rate rises to continue to feed through. Four members dissented and voted for a further immediate 25 basis point (bps) increase as they judged measures of wage and service inflation were at elevated levels not consistent with a return to the 2% target sustainably over the medium term.
Exhibit 1: UK Bank Rate unchanged at 5.25% for first time in 15 meetings
Paused, not yet out
Ahead of the September meeting, financial markets had been divided on the outcome, with expectations for a hike falling following the latest inflation print. The finely balanced decision was between the risk of not tightening enough in the face of continued inflation pressures and underestimating the impact of previous tightening still to come through. While the majority of the MPC chose to maintain rates at 5.25%, they have stated that monetary policy will need to be “sufficiently restrictive for sufficiently long to return inflation to the 2% target” over the medium term. The Committee has said they will closely monitor inflationary indications as well as the resilience of the economy. While the market is now expecting that we have reached or are near a peak in rates (Exhibit 2), “further tightening in monetary policy would be required if evidence of more persistent inflationary pressures appear.”
Exhibit 2: Forward SONIA rates indicate that Bank Rate could be near the peak
Investor implications
Liquidity strategies continue to benefit from the rapid rise in rates over the past 22-months and higher relative money market yields. With the increased conviction that the UK is nearing a peak in rates, investors should continue to prioritise a disciplined approach to cash segmentation across both liquidity and ultra-short term cash strategies.
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