Bank of England ends 14 consecutive interest rate hikes

A walkway near the Bank of England (BoE) in downtown London, Britain, on Thursday, March 18, 2021.

Holly Adams | Bloomberg | getty images

LONDON – The Bank of England ended 14 consecutive interest rate hikes on Thursday after new data showed inflation is now running lower than expected.

The bank has been raising rates steadily since December 2021 to rein in inflation, lifting its key policy rate by 0.1% to a 15-year high of 5.25% in August.

The British pound fell 0.7% against the US dollar immediately after the decision.

The Monetary Policy Committee voted 5-4 in favor of keeping the rate at that rate at its September meeting, with four members preferring a 25 basis point increase to 5.5%.

“There are increasing signs of some impact of tight monetary policy on the labor market and the pace of the real economy,” the bank said in a statement.

“The MPC will continue to closely monitor persistent inflationary pressures and signs of resilience in the economy as a whole, including the tightness of labor market conditions and the behavior of wage growth and service price inflation.”

The MPC voted unanimously to cut its stock of UK government bond purchases by £100 billion ($122.6 billion) over the next 12 months, to a total of £658 billion.

Investors on Wednesday bet that the Bank will halt its interest rate hike cycle after UK inflation came in much lower than expected in August.

Annual growth in the core consumer price index slowed to 6.7% from 6.8% in July, defying consensus forecasts that it would rise to 7%, as declines in food and housing prices pushed up prices at the pump. will be compensated. Specifically, the core CPI – which excludes volatile food, energy, alcohol and tobacco prices – fell to 6.2% from 6.9% in July.

On Thursday morning, currency markets were about 50-50 split on whether the bank would freeze or opt for a 25 basis point rate hike, according to LSEG data, before falling back to 60-40 in favor of a hike in the hours before the decision. First .

The work is ‘almost complete’

The Bank of England is walking a narrow path between bringing inflation back down to earth and sending the hitherto surprisingly strong economy into recession. Britain’s GDP shrank 0.5% in July, while several British companies issued profit warnings on Tuesday.

“While it may return to raising rates later in the year or into next year, the Bank of England is being bold and signaling that its work is almost done,” said Marcus Brooks, chief investment officer at Quilter Investors.

“Inflation came down surprisingly well yesterday and with the economic data coming in, the BOE clearly feels it now has enough cover to press the pause button and assess things as we move forward.”

The US Federal Reserve also kept its interest rates steady on Wednesday, but signaled it still expected another hike before the end of the year, as well as a smaller cut in 2024 than previously expected.

Brooks suggested the MPC would have one eye on the US, where sentiment still remains hawkish but where the economy is in a strong position to withstand further rate hikes.

Thomas Verbraeken, executive director of risk management research at MSCI, said the burning question is whether the Bank of England’s decision on Thursday signals the peak of the interest rate cycle.

“Policymakers are suggesting a preference for maintaining rates at current levels rather than further increases,” he said in an email.

“The argument is that a fixed rate can depressurize the economy more gently, averting increased risks to financial stability and corporate default, while more effectively transferring higher rates to fixed mortgage rates.”

Hussein Mehdi, macro and investment strategist at HSBC Asset Management, said there is now a “good chance” that the key policy rates at the Fed and the European Central Bank, as well as the Bank of England, have peaked.

Mehdi said, “While the latest UK wage growth data is cause for concern, labor market data is lagging. Forward-looking indicators suggest that the UK economy is already in recession, against the backdrop of slowing wage growth and is in line with the policy pivot.”

“We believe ongoing restrictive policy settings indicate there is a strong likelihood of a recession in developed markets in 2024.”

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