Bank of England holds interest rates for third time in a row, flags ‘limited’ economic developments

The Bank of England (BoE) has left interest rates on hold for a third time in a row and signalled it would not make cuts any time soon as it continues to battle inflation while keeping one eye on the state of the economy.

Interest rates remain at a 15-year high of 5.25 per cent after six of the central bank’s Monetary Policy Committee’s (MPC) nine members voted to hold at its final meeting of 2023.

The remaining three members preferred a 0.25 basis point rate rise.

Policymakers stressed once again that it is too early to start thinking about rate cuts while inflation remains persistently high, with the decision falling in line with economists’ expectations of a “wait and see” approach.

“Lags in the effects of monetary policy meant that sizable impacts from past rate increases were still to come through,” the committee said in its report on Thursday.

Inflation fell to a better-than-expected 4.6 per cent in October, largely thanks to a decline in the energy price cap for households.

However, this figure remains well above the government’s two per cent target. The Bank does not expect inflation to return to this level until the end of 2025.

“Although some of the news in key data had been to the downside since the MPC’s previous decision, economic developments had been relatively limited overall,” the committee said.

The MPC argued “key indicators” of inflation remained elevated and echoed its previous meeting by saying monetary policy would “likely need to be restrictive for an extended period of time”.

It added that “further tightening” would be needed in the case of “more persistent inflationary pressures”, raising the spectre of higher-for-longer rates.

Members arguing for a rate increase said it was needed “to address risks of deeply embedded inflation persistance and to return inflation to target sustainably in the medium term”.

The bank has been watching service inflation closely over the past year, as this has been a big driver of price rises. While falling energy prices have helped pull inflation lower, the rising cost of services has been putting upward pressure on the headline rate. The rate of inflation for services was 6.6 per cent in October.

The BoE has been walking a tightrope over the past year as it balances rate hikes to bring inflation under control while trying to avoid tipping the economy into a recession.

Policymakers’ November forecasts showed higher-for-longer rates would keep the economy on the brink of a recession until the end of 2025, with growth at a near standstill.

However, the latest data from the Office for National Statistics (ONS) on Wednesday showed gross domestic product fell 0.3 per cent in October, with the economy shrinking more than expected.

Members on Thursday expected GDP growth to be “broadly flat” in the fourth quarter of 2023 and “over coming quarters”.

They estimated that fiscal measures announced in Chancellor Jeremy Hunt’s Autumn Statement last month would boost GDP by some 0.25 per cent over the coming years and reduce inflationary pressures by increasing potential supply.

Although ONS data on Tuesday showed wage growth has slowed at the fastest rate for two years, suggesting weakening in the labour market, most policymakers argued it was too soon to tell whether service inflation and pay growth were on a “firmly downward path”, with both metrics coming in higher than other major economies.

The MPC forecasted a “general easing” for service inflation across 2024, driven by the moderation of non-labour cost pressures, but added that figures would “spike” in January.

The ONS’ unemployment figures for the last two months have been “experimental” estimates after falling response rates forced it to suspend its Labour Force Survey.

Policymakers noted “increased uncertainties” over the unemployment data and said they were considering “a wide range of indicators” on the labour market.

Markets have priced in interest rate cuts for the first half of 2024, with investors betting that inflation will continue cooling and high borrowing costs will dampen economic growth.

“We’ve come a long way this year, and successive rate increases have helped bring inflation down from over 10 per cent in January to 4.6 per cent in October,” said the Bank’s governor, Andrew Bailey.

“We’ll continue to watch the data closely and take the decisions necessary to get inflation all the way back to two per cent.”

The Bank’s decision comes after the US Federal Reserve kept interest rates on hold yesterday. The Fed signalled that it would cut rates three times next year as inflation fades, sending the Dow Jones index to a record high at the close.

The West’s other major central bank, the European Central Bank, is also expected to hold rates later today.