As was widely anticipated, at their meeting earlier today, the Bank of England’s Monetary Policy Committee (MPC) has decided to hold UK base rates at the current level of 5.25% for the third consecutive month.
After 14 successive interest rate hikes, this welcome hiatus has provoked a positive response from the markets, as investment managers consider what the latest news means for asset allocation and stock selection strategies into 2024.
All eyes are now focused on how quickly we might start to see reduced rates in 2024 , given the economic data which has shown that the economy is slowing down in response to higher rates. The market is now expecting there to be hefty UK (and US) interest rate cuts next year as a result.
Investment and economics experts have been sharing their reaction to today’s Bank of England interest rate news as follows:
Jeremy Batstone-Carr, European Strategist, Raymond James Investment Services, said:
“Despite easing inflation pressures, the Bank of England’s decision to hold the base rate at 5.25% shows that the reduction in inflationary pressures remains too slow for the Bank’s liking.
“This is the third successive policy meeting resulting in a standstill base rate, as the Bank continues to await sustained drops in inflation. The Monetary Policy Committee (MPC) may enact a change in course come 2024, though the lagged impact of earlier rate hikes will still be making their way through the economy, likely leading to flatlined activity for most of the new year before a partial upturn.
“Today’s decision comes in advance of next week’s CPI data, which will paint a clearer picture of the impact of inflation on the nation. For now, we remain at the peak of the rate hiking cycle.”
William Marshall, Chief Investment Officer – Hymans Robertson Investment Services (HRIS), said:
“Since the last Bank of England meeting there has been great progress with the inflation rate – it fell by 2.1% in October. The Monetary Policy Committee would have been especially pleased with the drop in the more domestically focused inflation metrics like services inflation and core CPI. This data all but confirmed that August’s 0.25% rate hike would be the last.
Investor focus has therefore moved toward interpreting any guidance from the MPC as to when the first interest rate cuts can be expected next year. Here, the MPC will try to reign in the market. Any overblown expectations of several rate cuts next year will likely weaken the pound and could once again exacerbate the inflation problem. Latest Consensus Forecasts doesn’t have the inflation rate falling below 3% until next April and the Bank of England’s own projections don’t expect them to meet their 2% target until 2025. Labour market pressures are only easing slowly so for this and other reasons the Bank of England will likely be behind both the Federal Reserve and European Central Bank in cutting rates next year.”
Richard Garland, Chief Investment Strategist, Omnis Investments, said:
“Recent big moves in bond yields will have reinforced the MPC’s desire to push back on the market’s increasingly aggressive bets for rate cuts in 2024, but this rate decision was a non-event. With the Fed turning more dovish it’s going to be hard to maintain appropriate market pricing for rates, so expect more forward guidance and focus on sticky services and wage inflation.”
Susannah Streeter, head of money and markets, Hargreaves Lansdown, said:
“The Bank of England isn’t budging from the summit, and as expected, policymakers are keeping rates on hold. Stubborn inflation is still a worry and it looks like we are set to be stuck on this cold high plateau for some time. The descent, when it comes, is likely to be gradual rather than a vertiginous drop.
“The timing of any cut will depend on treading the delicate balance between cooling inflation and supporting the economy, given that stagnation conditions have bedded in. Inflation is set to fall in next week’s figures – although not as dramatically as a month earlier. In fact, over the course of 2024, inflation may not fall as far, or as fast, as you may suspect – because the Bank of England will need to contend with domestically-fuelled inflation, which is a tough nut to crack. As a result, the Office for Budget Responsibility thinks inflation will average 3.6% in 2024. To keep this under control, the Bank of England is going to need to keep an iron grip on interest rates.
“On the other side of the coin is the state of the economy, which has just delivered particularly uninspiring GDP figures. All eyes will be trained on jobs and wage growth, and weakness in either could be the canary in the coalmine for the economy, which has been sustained by robust spending. If we get more weakness than is currently expected, that might encourage the Bank of England to cut rates sooner.
“Right now, forecasts for the first rate cut are spread between the spring and winter next year. On balance, cuts are unlikely until the second half of next year and even then, we’re expecting them to be fairly sedate. The mortgage and savings markets, however, won’t stand still waiting for something to happen.“
Ed Hutchings, Head of Rates at Aviva Investors, said:
“Once again, the Bank of England kept rates at 5.25%, with no change to the 6-3 voting pattern, and similar language used to the last meeting in early November. Going into the meeting and after the dovish Fed the day before, the market was pricing close to 1.25% of cuts in 2024.
“This is somewhat excessive, and we now would expect some of the size and speed of these cuts to be taken out. The BoE seems keen to push back on markets getting carried away with cuts, which should largely be supportive for the currency, but elsewhere, gilt yields could well retrace some of their very recent excessive gains.
“Medium-term however, with weaker growth and past hikes still yet to feed through, it’s getting clearer that this interest rate hiking cycle is close to, if not, done. This should in time ultimately be supportive for gilts.”
Lindsay James, investment strategist at Quilter Investors, said:
“Following in the Fed’s footsteps, the Bank of England’s monetary policy committee has held interest rates once more at its final meeting of the year. Unlike it’s US counterpart, however, it stopped short of committing to a switch in stance towards rate cuts just yet, noting that “monetary policy is likely to need to be restrictive for an extended period of time”.
“Investors have been pricing in several reductions throughout next year, but the Bank has today doubled down on its ‘higher for longer’ narrative. The Bank faces a considerably more difficult economic outlook than the Fed, with inflation still more than double its 2% target and GDP missing estimates and contracting 0.3% month-over-month in October, heightening the risk of a recession. Two years on from its first rate hike of this cycle, however, it is clear the Bank’s efforts are starting to take real effect and calls for cuts will only grow stronger should the economy continue to weaken.
“Ultimately it is good news for consumers that peak interest rates have more than likely now been reached, although notably 3 voting members of the 9-strong committee voted for a 25 bp hike. While we are already witnessing just how much markets can rally at the prospect of US rate cuts, it seems that in the UK more patience will be required.”
David Roberts, Head of Fixed Income at Nedgroup Investments said:
“The Fed was more dovish than expected, the meeting statement and accompanying dot plot both indicating a greater than prior forecast series of cuts in 2024. Bond and equity markets rallied aggressively. Powell, who had previously warned against yields falling too fast and derailing policy tightening, did not push back during his press conference.
The MPC impact on markets should have been dull by contrast, although to be fair the Fed was a hard act to follow. However, even a repeat of the 6-3 vote for no hike saw gilts initially sell off their best levels – presumably many in the market expected the remaining hawks to change their minds?
And on a similar theme, 2024 could now be dull for bond markets. At least at a headline level. US futures are pricing for up to 7 rate cuts, in the UK the number is 5. So, following the huge 2023 Q4 rally, market yields might not fall that much further by end 2024 given how much is in the price.”
Michael Metcalfe, Head of Macro Strategy, State Street Global Markets, comments on the BoE interest rate decision:
“The BoE may face a much weaker growth outlook than the Fed, but they have been unable to drop their tightening bias in November. Three members still voted an immediate hike and the decision to hold or hike rates remains finely balanced.
“Clearly, the BoE needs to see greater progress on inflation to effectively signal that rates have finally peaked. With the BoE potentially lagging rate cuts elsewhere early next year, this will provide further impetus for asset managers to continue to eliminate their still sizeable sterling underweight.“
Felix Feather, economist, abrdn, said:
“Market pricing suggests the possibility of rate cuts early next year has been growing, after a period of solid disinflation and increasing recession risks. But the Bank of England isn’t so sure. There’s clear evidence members are still a fair way away from embracing cuts. Of the MPC’s nine members, three voted to move rates even higher, with six in favour of a hold.
“Hawks on the committee remain concerned about the UK’s very elevated wage growth, and the upside risks to the wage outlook posed by the recently announced increase in the national living wage. We think the Bank will eventually have to sharply cut rates. But with credibility concerns and persistent inflation risks still at the front of MPC members’ minds, we don’t expect the first cut until the middle part of 2024.”
Derrick Dunne, CEO of YOU Asset Management, said:
“Another hold was wholly expected given slowing inflation data and a stable labour market outlook. The bank will have additional concerns now GDP appears to be going into reverse too.
“The overall economic outlook continues to be a big headache for the MPC. One more quarter of negative growth and we’ll be in a recession – putting the economy firmly in the territory of real stagflation. Employment is still confounding the faltering economic picture, but it tends to be the most lagging indicator for markets to measure, so should be taken with a pinch of salt at this juncture.
“The potential for recession in the UK looks like a bit of an outlier as the US economy appears much more robust, marking a potential divergence in rate expectations. If the next readouts on GDP don’t show more resilience, then markets might quickly begin to bring forward UK rate cut expectations.“
Jamie Niven, Senior Fund Manager, Candriam, comments on the BoE’s interest rate decision:
“The Bank of England MPC statement was more in line with what the market was expecting from central banks this week with acknowledgement on progress in fighting inflation but reticence to declare victory. While they continue to maintain that policy will need to remain restrictive, we don’t think that precludes cuts in coming quarters.
“In fact, significant cuts would still see monetary policy remaining in restrictive territory from our perspective. With deterioration in UK data recently and the pivot by the Fed overnight, we fully expect the Bank of England to start cutting around the same time and, given current pricing, should result in outperformance of the UK front end next year.”
