The Bank of England has paused its rate-hiking cycle, signaling its work could be almost done following a surprise drop in the headline inflation rate.
The Monetary Policy Committee voted to keep rates at 5.25 percent, the first pause in nearly two years.
Earlier this week, markets were confident the central bank would raise rates, but a worse-than-expected inflation reading sparked speculation that we could be near the end of the hiking cycle.
The decision puts the Bank of England in line with its peers the ECB and the Federal Reserve, which left rates unchanged at their meeting on Wednesday but did not rule out further increases.
Today’s decision means the Bank of England could be nearing the end of its tightening cycle. So have we peaked or could we be ready for further rate hikes?
Keep the fire going: the Bank of England has paused the bank interest rate at 5.25% after a fall in inflation
Why did the Bank of England maintain the base rate?
Even before today’s decision, the Monetary Policy Committee had indicated that we could be approaching the peak of the rate hike cycle.
Earlier this month, Andrew Bailey told the Treasury Select Committee: “I think we’re much closer to the top of the cycle now.” He also expressed concern that if the bank raises its rates too much, then it might have to cut too quickly.
The MPC was divided: five members voted to keep rates, while the remaining four voted to raise the base rate to 5.5 percent.
August’s inflation reading appears to have been the deciding factor in keeping rates at 5.25 percent, although members who voted to keep them also pointed to signs that the labor market is easing.
Most considered the biggest risk to be an over-tightening, before the full effect of previous interest rates has filtered through.
The MPC report, published alongside the base rate decision, said: “For the majority of members within this group, recent developments meant that the decision to keep the bank rate unchanged at this meeting rather than increase it It was finely balanced.”
‘Given the significant increase in bank rates since the start of this tightening cycle, the current monetary policy stance was restrictive.
Considerable impacts of past increases [are] still to pass
“This meant that the decision on whether to raise or maintain the bank rate at this meeting had been more finely balanced between the risks of not tightening policy enough when underlying inflationary pressures could still prove persistent, and not giving enough weight to the impact of the previous tightening that had not yet materialized in activity and inflation.
When the bank raises its rate, it can take up to two years for it to have a full effect on the economy.
According to the committee, this delay in policy meant that “considerable impacts from earlier increases were yet to manifest.”
> What does the interest pause mean for your mortgage and savings?
Could there be another base rate increase this year?
The Bank of England’s neutral language and references to a “finely balanced” decision suggest it will not be a difficult brake on interest rate rises for the time being.
In his letter to the Chancellor, Andrew Bailey said: ‘There is absolutely no room for complacency. I can assure you that the MPC will stay the course and maintain a sufficiently restrictive monetary policy for long enough to return inflation to the 2 per cent target in the medium term.
Inflation remains three times the level of the Bank’s long-term inflation target of 2 percent.
The nearly even split of his committee members alone suggests that another pause in November is not a given.
Some economists believe interest rates have peaked at 5.25% after today’s pause.
The delay in monetary policy means the Bank could be adopting a “wait and see” strategy to see how previous rate hikes have trickled down to the economy before the end of the year.
It will also examine inflation readings for September and October. If core inflation were to start rising again, a decision could be made to increase the base rate.
The Bank said: “CPI inflation is expected to fall significantly further in the near term, reflecting lower annual energy inflation, despite renewed upward pressure on oil prices, and further falls in inflation of food and basic goods prices.
“However, utility price inflation is expected to remain elevated in the near term, with some potential month-to-month volatility.”
Bailey added: “Monetary policy will need to be sufficiently restrictive for long enough to return inflation to the 2 per cent target on a sustainable basis over the medium term.” […] Further tightening of monetary policy would be necessary if there were evidence of more persistent inflationary pressures.
Paul Dales, chief economist at Capital Economics in the UK, believes this careful language is because the Bank wants markets to believe the “high for long” narrative.
‘The Bank does not want markets to conclude that a spike in rates will be quickly followed by a shift towards rate cuts, which would loosen financial conditions and undermine its attempts to quell inflation.
“The language also gives the Bank the flexibility to respond to new developments.”
While the Bank may not be revealing much, some analysts believe this will be the last rate hike in this cycle.
Both Dales and Samuel Tombs, chief economist at Pantheon Macroeconomics in the UK, believe interest rates have peaked at 5.25 per cent, rather than previous forecasts of 5.5 per cent.
“With surveys pointing to a further rise in labor market slack, a slight slowdown in wage growth and lower CPI inflation by the end of the year, the case for raising again will likely not be stronger in November or December than today,” Tombs said.
“Consequently, we now think that 5.25 percent will be the maximum level of the bank rate in this hiking cycle.”
Dales said: “We believe rates will remain at this 5.25 per cent peak for longer than the Fed, ECB and investors expect, but that when rates are cut at the end of 2024, they will be reduced. faster and faster than expected.
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