The Bank of England Expected to Keep Interest Rates Unchanged
The Bank of England is anticipated to maintain its current interest rates, as recent data indicates a decrease in price pressures and a weakening economy. The market is pricing a 93% probability of a second consecutive hold, after the Bank surprised with a pause in September following 14 consecutive hikes.
Inflation and Economic Activity
In September, UK inflation remained at 6.7%, higher than other G7 economies but on a downward trajectory. Recent PMI data suggests a soft economic growth outlook, with a decline in business activity for the third straight month. The manufacturing and services sectors both experienced lower output, while new work and backlogs declined. Private sector employment also fell, leading to lower confidence in the year-ahead business outlook.
Experts believe that the UK’s economic activity has further slowed, with a weaker housing market and falling consumer spending. Inflationary pressure is also dissipating. However, wage growth has surprised to the upside, although this is not expected to persist given other indicators of labor market weakness. Market consensus agrees that rates will remain on hold.
Long-Term Impacts and Future Projections
There is a belief that the long lags between changes in monetary policy and their impact on the UK economy mean that previous hikes have not yet fully affected the economy. The Monetary Policy Committee (MPC) will likely keep its options open but wait to observe the impact of prior rate increases. Barclays predicts that rates will remain at 5.25% until August 2024, followed by four expected 25 basis point cuts.
Markets Not Expecting Rates Below 4% ‘Ever Again’
While assessing the lagging impact of monetary tightening, the MPC remains concerned about persistent rises in the cost of living. Energy price and supply chain risks could arise from the Israel-Hamas conflict. Despite expectations that there will be no further rate hikes, the market’s central case is for the Bank of England to not cut interest rates below 4% in the future. However, experts argue that the hit to UK growth from aggressive rate hikes may be greater than currently anticipated, leading to decreased inflation pressure in the coming years.
Central Banks Reaching the End of Monetary Tightening Cycles
Central banks worldwide are approaching the end of lengthy monetary tightening cycles as they successfully combat high inflation. The US Federal Reserve is expected to leave rates on hold, while the European Central Bank recently held rates steady at their current record high of 4% after ten consecutive hikes.