Bank of England Keeps Rates at 5.25%, Hawkish Stance Bucks Fed and ECB to tame inflation

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The Bank of England (BoE) announced on Thursday that it would maintain its main interest rate at 5.25%, the highest level since 2008, as it continues to battle the highest inflation among the world’s major advanced economies. The BoE also published its quarterly forecasts, which showed that the British economy is barely growing, and that inflation is expected to remain above its 2% target for the next three years.

The BoE’s decision was widely expected by analysts and investors, who had seen a more than one in three chance of a half-point rate hike to 5.5% before the meeting. However, the BoE surprised the markets by giving no indication that it was close to ending its tightening cycle, which has seen 14 consecutive rate increases since August 2022.

The BoE said that its monetary policy was “sufficiently restrictive for sufficiently long” to bring inflation back to its target, and that further tightening would require “fresh evidence of inflation persistence”. The BoE’s governor, Andrew Bailey, stressed that he did not think “it’s all over” and that it was “far too soon” to speculate about the timing of any rate cuts.

The BoE’s hawkish stance contrasted with the signals from the U.S. Federal Reserve and the European Central Bank, which both raised their interest rates by a quarter-point last week but suggested that they were nearing the end of their tightening cycles. The BoE said that it faced a different set of challenges than its peers, as Britain had experienced a sharper rise in inflation and a weaker recovery from the coronavirus pandemic.

British inflation hit a 41-year high of 11.1% in October 2023 and has fallen more slowly than elsewhere, standing at 7.9% in June 2023, the highest of any G7 country. The BoE attributed this to a combination of factors, such as higher energy prices, supply chain disruptions, labour shortages, and strong consumer demand. The BoE also said that wage growth had been “materially above” its previous forecasts, which could fuel further price pressures.

The BoE’s forecasts showed that inflation would peak at around 8% in the fourth quarter of this year, before gradually declining to around 3% by the end of 2025. However, this projection assumed that the Bank Rate would remain unchanged at 5.25% until mid-2024 and then fall to 4.75% by the end of 2025. The BoE also warned that there were significant uncertainties and risks around its central scenario, such as the evolution of the pandemic, the impact of Brexit, and the global economic outlook.

The BoE’s forecasts also showed that the British economy would grow by only 0.1% this year, down from its previous estimate of 1.6%, before rebounding to 2.8% next year and 2.4% in 2025. The BoE said that economic activity had been weaker than expected in recent months, mainly due to supply bottlenecks and labour market frictions. The BoE also said that consumer spending had slowed down as households faced higher costs and lower incomes.

The BoE’s decision was supported by six members of its nine-member Monetary Policy Committee (MPC), while three members voted for a quarter-point rate hike to 5.5%. The dissenters argued that a more aggressive policy response was needed to prevent inflation expectations from becoming unanchored and to preserve the credibility of the BoE’s inflation-targeting framework.

The market reaction to the BoE’s announcement was mixed, as investors adjusted their expectations for future policy moves. The British pound rose slightly against the U.S. dollar and the euro, while British government bond yields fell across the board. The FTSE 100 index of leading British shares gained about 1.2%, outperforming other European markets.

Analysts had mixed views on the BoE’s decision and outlook, with some saying that the BoE was close to peak rates and others saying that more rate hikes were likely in the coming months. Some also questioned whether the BoE’s policy stance was appropriate for an economy that was facing both high inflation and low growth.

The BoE’s next policy meeting is scheduled for December 16, when it will also publish its updated financial stability report. The BoE will have to balance its dual mandate of maintaining price stability and supporting economic growth, while also monitoring the developments in the domestic and global environment.


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