LONDON — The Bank of England paused its series of interest rate hikes on Thursday after new data revealed that inflation is currently below expectations. This decision marks the end of 14 consecutive rate increases since December 2021 as the Bank sought to control inflation. In August, the main policy rate reached a 15-year high of 5.25% after starting at 0.1%.
Following the announcement, the British pound weakened by 0.7% against the U.S. dollar. The Monetary Policy Committee voted 5-4 in favor of maintaining the rate at the September meeting, with four members preferring another 25 basis point increase to 5.5%. In a statement, the Bank acknowledged the impact of tighter monetary policy on the labor market and overall economic momentum.
The MPC also unanimously agreed to reduce its stock of U.K. government bond purchases by £100 billion ($122.6 billion) over the next year, bringing the total to £658 billion. On Wednesday, investors predicted that the Bank would pause its rate hiking cycle after U.K. inflation remained significantly below expectations for August.
The annual increase in the consumer price index dropped to 6.7% from July’s 6.8%, contrary to the forecasted rise to 7%. This decline was attributed to lower food and accommodation prices offsetting higher prices at the pump. Core CPI, which excludes food, energy, alcohol, and tobacco prices, also decreased to 6.2% compared to July’s 6.9%.
Prior to the decision, money markets were divided on whether the Bank would pause or proceed with a 25 basis point increase. Bank of England Governor, Andrew Bailey, stated that while falling inflation is positive news, vigilance is necessary and further increases may be required to meet the desired level of inflation.
Job ‘nearly done for now’
The Bank of England has been navigating a delicate balancing act between curbing inflation and avoiding a recession in the robust economy. U.K. GDP contracted by 0.5% in July, and several British companies issued profit warnings on Tuesday.
Marcus Brookes, chief investment officer at Quilter Investors, commented on the Bank’s decision, stating that although there may be future rate hikes, the Bank is signaling that its current task is almost complete. The surprise downward movement of inflation, coupled with declining economic data, has prompted the Bank to pause and evaluate the situation.
Similarly, the U.S. Federal Reserve maintained its interest rates but indicated that it anticipates one more hike before the end of the year, with fewer cuts in 2024 than previously expected. Brookes suggested that the MPC will consider the U.S., where sentiment remains hawkish but the economy is better positioned to withstand another rate increase.
Thomas Verbraken, executive director of risk management research at MSCI, highlighted the question of whether the Bank of England’s decision marks the peak of the interest rate cycle. He suggested that a steady rate can cushion the economy more gently, mitigating risks to financial stability and corporate defaults, while still effectively transmitting higher rates to fixed mortgage rates.
Hussain Mehdi, macro and investment strategist at HSBC Asset Management, expressed the view that there is now a “good chance” the Bank of England, along with the Fed and the European Central Bank, have reached their peak policy rates. Mehdi pointed out that although the latest U.K. wage growth figures are concerning, labor market data lags behind. Forward-looking indicators indicate that the U.K. economy is already approaching recession, which aligns with cooling wage growth and a policy shift.
“We believe ongoing restrictive policy settings indicate there is a strong likelihood of developed markets entering recession in 2024,” Mehdi stated.
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