In a decision that was widely expected, the Bank of England announced on Thursday that it will keep its main interest rate unchanged at 5.25%. This decision comes as the central bank aims to maintain a restrictive monetary policy for an extended period of time. Although some members of the Monetary Policy Committee (MPC) argued for a further increase of 25 basis points to 5.5%, a majority of 6-3 voted in favor of holding rates steady for the third consecutive meeting.
The decision to maintain the current interest rate is influenced by the U.K.’s headline inflation, which fell to an annual rate of 4.6% in October – the lowest point in two years. However, wage growth has still not met expectations and remains uncomfortably high for the central bank. While the Bank of England aims to bring inflation down to its target of 2% sustainably, it acknowledged that key indicators of U.K. inflation persistence remain elevated.
The MPC noted in its report that tighter monetary policy has led to a looser labor market, which in turn has weighed on activity in the real economy. In the third quarter, real U.K. GDP remained flat as projected by the Monetary Policy Committee, but the unexpected decline of 0.3% month-on-month in October raises concerns about the economy’s performance.
After a series of 14 consecutive rate hikes, the Bank of England halted the upward trajectory in September. From December 2021 to August 2023, the benchmark rate was gradually increased from 0.1% to a 15-year high of 5.25%. However, the recent dovish surprise from the U.S. Federal Reserve, which revealed plans for at least three interest rate cuts in 2024, has not influenced the MPC’s decision. The Bank of England reiterated that it intends to keep rates in restrictive territory for an extended period to achieve its inflation target over the medium term. The committee stated, “Further tightening in monetary policy would be required if there were evidence of more persistent inflationary pressures.”
According to November’s Monetary Policy Report, the consumer price index is projected to average around 4.75% in the fourth quarter of 2023. This is expected to drop to approximately 4.5% in the first quarter of the following year and further decrease to 3.75% in the second quarter. Concurrently, GDP is forecasted to grow by a mere 0.1% in the fourth quarter, following a stagnant performance in the previous quarter.
Although the Bank of England’s decision suggests that interest rates have peaked, there are concerns that the monetary policy stance may be too tight for the fragile economic backdrop. Suren Thiru, economics director at ICAEW, argued that the Bank’s rhetoric on rates is unnecessarily hawkish, especially considering the slowing wage growth and deteriorating economy. He expressed fears that keeping rates high for too long could unnecessarily harm an already struggling economy. Thiru believes that as inflation continues to trend downwards and the risk of recession looms, the case for interest rate cuts is likely to grow in the coming months.
The Bank of England’s decision to maintain its main interest rate at 5.25% reflects its commitment to a restrictive monetary policy for an extended period of time. Despite a decline in headline inflation, wage growth remains a concern. The impact of tighter monetary policy on the real economy is evident in the flat GDP growth and the unexpected contraction in October. While the U.S. Federal Reserve signals a more accommodative approach, the Bank of England stands firm in its determination to return inflation to its target. However, there are growing concerns that the Bank’s hawkish stance may be too cautious, given the deteriorating economic conditions. As inflation continues to decrease and recession risks persist, the case for interest rate cuts may become more compelling in the coming months.