A path near the Bank of England (BOE) in London, England, on Thursday, March 18, 2021.
Holly Adams | Bloomberg | Good pictures
LONDON — The Bank of England ended 14 straight interest rate hikes on Thursday after new data showed inflation is now running below expectations.
The bank has continued to raise rates since December 2021 in an effort to control inflation, raising its key policy rate in August to a 15-year high of 5.25% from 0.1%.
The British pound fell 0.7% against the US dollar shortly after the decision.
The Monetary Policy Committee voted 5-4 in favor of keeping the rate steady at its September meeting, with all four members favoring another 25 basis point hike to 5.5%.
“Some of the effects of tighter monetary policy on the labor market are increasing, and generally at the pace of the real economy,” the bank said in a statement.
“The MPC will continue to monitor signs of persistent inflationary pressures and resilience in the overall economy, including the tightening of labor market conditions and the behavior of wage growth and services price inflation.”
The MPC voted unanimously to reduce its holdings of UK government bond purchases by £100 billion ($122.6 billion) over the next 12 months to a total of £658 billion.
Investors bet on Wednesday that the Bank will pause its interest rate hike cycle after UK inflation came in significantly below expectations for August.
Annual growth in the consumer price index eased to 6.7% from 6.8% in July, defying consensus forecasts for a rise of 7%, as easing food and accommodation prices offset inflation at the pump. Notably, core CPI – excluding volatile food, energy, alcohol and tobacco prices – fell to 6.2% from July’s 6.9%.
On Thursday morning, money markets were roughly split 50-50 on whether the bank would hold off or opt for another 25 basis point hike, according to LSEG data. .
“Inflation is falling and we expect it to fall further this year. This is welcome news,” Bank of England Governor Andrew Bailey said in a video statement.
“Our previous interest rates are working, but let me be clear that inflation is not where it needs to be and there is no room for complacency. We will be watching closely to see if further increases are needed. We need to keep interest rates high enough over the long term to make sure we get the job done.”
Work ‘Almost Done’
The Bank of England is treading a narrow path between bringing inflation back down to earth and plunging a hitherto surprisingly strong economy into recession. UK GDP shrank 0.5% in July, with many British companies issuing profit warnings on Tuesday.
“While it may raise rates later in the year or into next year, the Bank of England is being bullish and signaling that its work is now done,” said Marcus Brooks, chief investment officer at Quilter Investors.
“Inflation surprised yesterday’s fall and with the economic data rolling in, the BoE now feels it has enough cover to hit the pause button and assess things as we go.”
The U.S. Federal Reserve kept its interest rates steady on Wednesday, but expects one more hike before the end of the year, and with fewer cuts in 2024 than previously expected.
Brooks suggested the MPC would keep an eye on the US, where sentiment remains sour but the economy is in a strong position to absorb further rate hikes.
Thomas Verbregen, MSCI’s managing director of risk management research, said the burning question is whether the Bank of England’s Thursday decision marks the peak of the interest rate cycle.
“A fixed rate would squeeze the economy more slowly, avoiding greater risks to financial stability and corporate defaults, while more effectively channeling higher rates into fixed mortgage rates,” he said in an email.
Husain Mehdi, macro and investment strategist at HSBC Asset Management, said there was a “good chance” the Bank of England’s key policy rate would peak, along with the Fed and European Central Bank’s policies.
“While recent UK wage growth numbers are a cause for concern, labor market data lag behind. Forward-looking indicators suggest the UK economy is already drifting into recession, which is consistent with wage growth and policy focus,” Mehdi said.
“We believe that current restrictive policy settings indicate that developed markets have a strong chance of entering recession in 2024.”
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