Bank of England Leaves Interest Rates Unchanged, Expects Prolonged Tight Monetary Policy
LONDON — On Thursday, the Bank of England announced its decision to keep interest rates unchanged, stating that monetary policy will likely need to remain tight for an “extended period of time.” The Monetary Policy Committee voted 6-3 in favor of maintaining the main Bank rate at 5.25%. However, three members of the committee preferred another 25-basis point increase to 5.5%.
Earlier in the day, financial markets had predicted an 89% chance of a second consecutive hold, based on data from the London Stock Exchange Group. This decision comes after the Bank ended a streak of 14 consecutive rate hikes in September.
In its statement, the MPC stated, “The MPC’s latest projections indicate that monetary policy is likely to need to be restrictive for an extended period of time. Further tightening in monetary policy would be required if there were evidence of more persistent inflationary pressures.”
While inflation has weakened to 6.7% since the MPC’s last projections in October, it remains well above the central bank’s target of 2%. Additionally, economic activity has significantly softened, and there are signs of loosening in the labor market.
According to the accompanying Monetary Policy Report, the Committee noted that inflation has fallen below the expectations outlined in August. The Bank now expects the consumer price index to average around 4.75% in the fourth quarter of 2023, before dropping to approximately 4.5% in the first quarter of next year and 3.75% in the second quarter of 2024.
The UK’s GDP is projected to have flatlined in the third quarter of 2023, which is a weaker performance than initially anticipated in August. The GDP is now expected to grow by just 0.1% in the fourth quarter, also lower than August’s projections.
The MPC’s statement emphasized that monetary policy will need to be sufficiently restrictive for an extended period to sustainably bring inflation back to the 2% target.
In response to the Bank’s decision, British Chancellor of the Exchequer Jeremy Hunt stated that although the UK has been “far more resilient than many expected,” sustainable growth is the key to prosperity. He added that the Autumn Statement will outline plans to boost economic growth through unlocking private investment, increasing employment, and delivering a more productive British state.
The U.S. Federal Reserve also maintained its interest rates unchanged on Wednesday and upgraded its economic growth assessment. Chairman Jerome Powell stated that the Federal Open Market Committee is not currently discussing rate cuts. However, the markets interpreted Powell’s comments during the press conference as dovish, leading to a significant fall in short-term U.S. Treasury yields that also affected Europe and the UK.
Ahead of the Bank of England’s decision, two-year UK gilt yields reached their lowest point since June. It’s important to note that yields move inversely to prices.
The Bank’s decision to maintain interest rates unchanged reflects its cautious approach to the economy’s future, emphasizing the need for tight monetary policy to combat persistent inflationary pressures.