Bank of England Keeps Rates On Hold For Second Successive Meeting As Expected

Concluding the barrage of this week's central bank announcements, moments ago the Bank of England, in a 6-3 vote split (with the minority of Greene, Haskel and Mann voting to raise by 25bps), kept interest rates on hold at 5.25% as expected for the second successive meeting, following the footsteps of other central banks around the world.

The majority agreed that the decision was “finely balanced” between no change and hike, while BoE gov Bailey said the MPC would be watching “closely” to see if further rate rises were needed, adding “it’s much too early to be thinking about rate cuts.”

The decision follows the US Federal Reserve on Wednesday and the European Central Bank last week, which also both kept rates unchanged (the BOJ continues doing its "special thing" in its own central bank corner).

The BOE said that "higher interest rates are helping to bring inflation down. This means the speed at which prices rise is slowing. We expect inflation to fall further this year."

Some more details from the decision:

• Policy likely needs to be restrictive for an extended period.
• Maintains language that MPC will ensure bank rate is sufficiently restrictive, for sufficiently long.
• Considers a wide range of labour data given ONS labour force survey issues.
• Raises medium-term equilibrium unemployment rate estimate to around 4.5% (prev. 4.25%)
• Risks to inflation projections still skewed to the upside.
• Little news on inflation persistence since September.
• Employment growth likely softer in H2 23 than previously forecast
• Pay growth is high but strong private sector regular earnings are not apparent in other series.
• Only about half of the impact of higher rates has been felt so far.
• Investors show rising conviction on higher-for-longer UK policy path.
• Governor Bailey says BoE is watching closely to see if further rate hikes are needed and it is much too early to think about rate cuts.

New forecasts from the Bank show it is treading a delicate line as it seeks to beat inflation while not pushing a weakening UK economy into an outright recession in 2024, which is expected to be an election year. UK interest rates are at their highest levels since the financial crisis, as the bank weighs evidence of weak growth against consumer price inflation of 6.7%.

Looking ahead, the MPR cut its inflation forecast for 2023 while hiking 2024 and 2025; it also trimmed growth forecasts in the outer years (from the latest forecast)

Inflation:

• 2023 4.75% (prev. 5.00%)
• 2024 3.25% (prev. 2.5%)
• 2025 2% (prev. 1.50%)

Growth:

• 2023 0.50% (prev. 0.50%)
• 2024 0% (prev. 0.50%)
• 2025 0.25% (prev. 0.25%)

In kneejerk response, sterling jumped from 1.2194 to 1.2216 while gilt futures were chopping but ultimately moved a little lower, from 94.48 to 94.32.

As Newsquawk notes, markets saw a modest hawkish reaction likely as a by-product of some expecting a more dovish vote split or even a vote for a cut by Dhingra. Furthermore, the MPC has kept the option for further hikes on the table and says it is too early to talk of cuts. Also, inflation is not seen falling below 2% until Q4 2025 vs. prev. view of 02'25.