It’s no surprise to see that at their meeting earlier today, the Bank of England’s MPC has decided to hold UK base rates at the current level of 5.25% for the fourth consecutive month.
The announcement, similar to the MPC’s previous decision, was predicted and expected and so now investment managers look to the next rate announcement and what may happen later in 2024.
The reaction to the Fed announcement that they will hold rates at their current level was muted as they made it clear it was unlikely they would be ready to start making cuts at their March meeting.
The question on everyone’s mind now will be whether the Bank of England will follow the Fed or make the first move to start cuts at the next MPC meeting. The split of votes was a majority of 6-3, similar to the more recent meetings, suggesting that some are ready to start reductions, whereas the more cautious approach continues to win on numbers.
A hold of rates rather than an increase always seems to make the markets happy, so for now, we let out a breath and look forward. There will certainly be a lot of contributing factors over the next 6 weeks or so, as to whether we see a rate decrease, but we will continue to watch this space and bring you news as it happens.
For now, investment and economic experts have been sharing their reaction to today’s Bank of England interest rate news:
Jeremy Batstone-Carr, European Strategist at Raymond James Investment Services, said:
“The Bank of England has, as expected, kept the UK base rate on hold at 5.25% for the fifth consecutive meeting. It has however signalled preparedness to cut rates in the future, so long as inflationary pressures continue to subside, which will give hope to struggling households and businesses.
“The justification for holding rates lies in the fact that inflation fell faster over the autumn months than was previously predicted, with further deceleration expected in the months to come. Despite talk about an increase in price pressures as a result of supply disruptions in the Red Sea, the Bank has decided that this is unlikely to have a significant impact on domestic inflation.
“It appears there no longer exists a firm commitment to keep rates at levels restrictive to economic activity. However, rate-setters are likely to tread warily and will wait to see confirmation that inflation has resumed its downward pathway before committing to policy easing. While the exact timing of the first rate cut remains in doubt, the point at which monetary policy is finally loosened is probably not all that far away.”
Rob Morgan, Chief Investment Analyst at Charles Stanley, said:
“The Bank of England (BoE) has kept its base rate at 5.25% today, the fourth consecutive freeze. Although inflation pressures show clear signs of easing, the Bank remains keen to keep a tight grip and leave rates in restrictive territory while it gains more confidence that price rises are thoroughly vanquished.
“Central banks on both sides of the Atlantic are slowly but surely stuffing the inflation genie back into the bottle. Following a period of restrictive interest rates to quell the flames of price rises, inflation is melting away and 2024 is the year of the ‘pivot’ when they can turn their attention to when to cut rather than worrying whether they might raise them further.
“Despite the recent good news on inflation, there is a risk most of the easy wins are behind us and the BoE will not wish to declare victory too soon. Instead, it will likely lean towards keeping rates in restrictive territory for the first half of this year as it awaits concrete evidence that wage growth and services inflation are falling back, which will more conclusively signal that price rises are set to return to target.
“This will likely arrive in the coming months, and then, perhaps starting in June, the Bank will start to tentatively reduce rates.“
Richard Garland, Chief Investment Strategist at Omnis Investments, said:
“There was no chance of any movement in interest rates today and unlike the Fed there is not much room for speculation about an early Spring cut. However, the economy is set to run sub-par throughout 2024 so it is simply a question of when the Bank begins to cut rates rather than if, in 2024.“
Pieter Staelens, Lead Fund Manager at CVC Income & Growth, said:
“There was always little chance of rates changing today, but what is notable is the cautious tone struck by the bank in its message to markets and those expecting significant rate cuts in the near term. Two members of the MPC still voted for rate hikes.
“With half the world electing new governments in 2024 and increasing geo-political uncertainty as well as long-term structural pressures like shrinking labour supply, inflationary pressures are unlikely to completely disappear anytime soon – even if we see some cuts in the short to medium term. Volatility is the new normal.”
Lindsay James, investment strategist at Quilter Investors, said:
“The Bank of England has continued its steady as she goes approach with interest rates by holding them again. Given economic growth is stagnating but not yet properly declining, and with confidence improving, the BoE will want to keep its powder dry before pivoting to rate cuts later in the year.
“Indeed, the latest inflation figures show that while it is falling, the journey back to 2% is not a smooth one, and thus they will not want to jump the gun and cut too early. Given the fragile nature of this economic environment, and the geopolitical risks playing out, Andrew Bailey and co will take a cautious approach rather than risk another inflation spike.
“What is likely to switch the conversation on rate cuts is if the 2% target is hit sooner than thought. However, we are beginning to see signs that the BoE may move soon as there was a vote at today’s meeting for a cut. There is a chance that it is reached in April, but with recent readings showing an unexpected jump, and some forecasts suggesting that attainment of the 2% level will be short-lived, the Committee is keen to mirror the Federal Reserve in promoting a ‘data dependent’ approach.
“It is likely though that rate cuts will need to be brought in sooner rather than later. The UK economy is in somewhat of a malaise, and rates at this level for too long may end up being overly constrictive. It remains to be seen if a recession can be dodged, and even despite the improving backdrop, failure for economic growth to materialise may just spark the BoE into action.”
Luke Bartholomew, Senior Economist at abrdn, said:
“No surprises on the overall decision by the Bank of England to keep rates on hold today. But the three-way split in the votes, with some policy makers dissenting from the majority to vote for further hikes and some for cuts, shows how finely balanced the outlook on the UK economy is at the moment.
“Clearly most of the Monetary Policy Committee still think inflation risks are skewed to the upside and so want to push back against market speculation about an imminent rate cut. It seems like the re-indexation in many wages and prices this April will be a key waymark for interest rates. If this sees a re-acceleration in inflation pressure, then policy will need to be restrictive for longer.
“But if, as we expect, inflation falls sharply by the middle of the year, we think this will provide the all-clear for cuts to begin. And given the weak growth environment, when cuts do start, they’re likely to be quite rapid.”
Susannah Streeter, Head of Money and Markets at Hargreaves Lansdown, said:
”There were no bold moves in sight, just another hold from Bank of England policymakers. It’s hardly surprising that inaction is the order of the day, given that inflation ticked up in December. It hardly set the stage for an interest rate cut.
However, at the moment, all attention is on the mood music from the Bank of England rather than just the drum beat of the rate decision. There was a slight shift in sentiment around the table. Instead of three decision makers voting to increase rates yet again, two voted for a rate rise and one for a cut.
Interest rate cuts are still in the pipeline this year, but it’s clear they’ll take a bit more time to flush out. Inflation is expected to return to 2% in the middle of this year – but not for long. It’s expected to rise again in the second half of the year. The Bank of England didn’t waver from the line that monetary policy would have to ‘remain restrictive’ for ‘an extended period of time’ until inflation is ‘sustainably’ at 2%.
The Bank’s policymakers are highly unlikely to make a move before the March Budget, given that voter sweeteners like tax cuts and duty freezes could see demand in the economy tick up. The impact of delays to imported goods re-routed from the Red Sea is still uncertain, and could tip some prices upwards.”
Mitul Patel, Senior LDI Portfolio Manager at State Street Global Advisors, said:
“The MPC voted to keep rates on hold, but votes both for tightening and easing reveal an increasing divergence in the views on the committee. Having also dropped the reference to the risk of further tightening, it is clearer that we are likely at the peak in interest rates now. However, Bailey also made it clear that the committee needs more evidence that inflation is heading back to target before lowering rates.
Their forecasts now show that inflation could fall to their 2% target within the next few months, given the recent fall in commodity prices, but further softening in the labour market will be necessary to keep inflation close to target. We continue to expect interest rate cuts later in the year, but there is unlikely to be an imminent change in Bank Rate.”
Daniele Antonucci, Chief Investment Officer at Quintet Private Bank (parent of Brown Shipley), said:
“The important thing for markets was to find extra clues on the timing of future rate cuts, but that timing still remains quite uncertain. Our view is that interest rate reductions will likely come before long, but we also think markets have got somewhat ahead of themselves with their expectations of sharp and fast rate reductions.
“Inflation is on a better trajectory now, slowing from about 10% to 4% currently. However, it did re-accelerate slightly over the past month or so and the Bank is arguing it needs to see more evidence that inflation is falling before implementing cuts.
“Ultimately, we think UK policymakers will strike a balance. Likely, they don’t see a compelling reason to rush into a rate-cutting cycle just yet. But, with a weak economy and an inflation path that’s now more benign, our sense is that by mid-year they’ll have embarked in a process of measured rate reductions.”
Ed Hutchings, Head of Rates at Aviva Investors, said:
“Once again, the Bank of England kept rates at 5.25%, but there were changes to the voting pattern – with Dhingra the first MPC member to vote for a cut. Given the three-way split in voting, it’s clear hawkish concerns remain amongst MPC members, but there has been a shift in a dovish direction.
“However, it’s arguable that a bigger shift from the hawks is needed for a cutting cycle of any kind to really begin. For now, we would expect the Sterling to hold up and for gilt yields to continue some of their recent cross-market under-performance.
“Looking past this, and with past hikes still yet to feed through, it’s clear we are getting closer to the first cut, which should in time be ultimately supportive for gilts as an asset class.”
Shane O’Neill, Head of Interest Rates at Validus Risk Management, said:
“The Bank of England matched market expectations this afternoon and kept policy rates on hold, the decision came with a batch of forecast revisions – all of which made for positive reading. Inflation is expected to fall to 2% in 2024 before picking up slightly to 2.3% in 2026, GDP forecasts were revised higher with 0.25% growth in 2024, followed by 0.75% and 1% growth in the two following years. Despite this, the BoE still see inflation risks skewed to the upside and the governor noted that they need to “see more evidence that inflation is set to fall all the way to 2%” before they can consider cutting interest rates.
“This rhetoric supports our view that the market is currently overzealous in their pricing of rate cuts – before the meeting markets were pricing 115bps of cuts for this year and this has been marginally adjusted lower to 110bps following the release, and we believe this has further to go. The MPC were split on their decision to keep rates on hold – one member voted for a cut, two voted for a hike, and the other six voted to keep rates on hold. This is the first time since 2008 we have seen the committee vote in different numbers for a hike, cut and hold in the same meeting.
“At Validus Risk Management, we believe there is merit to the arguments put forward by Haskel and Mann (both of whom voted for a hike) – they remain concerned about rising household income, tight labour markets, and what these mean for inflationary pressures. Adding to these pressures, and highlighted by Governor Bailey today, are the geopolitical tensions which stand to increase inflationary pressures through 2024.”
Sekar Indran, Senior Portfolio Manager at Titan Asset Management, said:
“Bailey offered a not-too-dissimilar tone to his peer across the pond, Jerome Powell, stating further evidence of inflation easing is needed before we see a rate cut. The reality is the MPC is in a less fortunate position than the FOMC with the highest inflation in the G7 and economic growth among the lowest. The downturn in manufacturing output also shows no signs of abating as per this morning’s PMI data with demand continuing to soften and supply chain disruptions re-emerging.
The swaps market continues to price that the US will move first which we would agree with, but we believe the magnitude of cuts may end up being greater in the UK relative to the US, contrary to what the market is pricing.”
April LaRusse, Head of Investment Specialists at Insight Investment, said:
“The Monetary Policy Committee faced a tricky balancing act today, needing to pivot towards future rate cuts, but maintaining a sufficiently hawkish position that market exuberance was kept in check.
“Overall, we think they did a pretty good job. References to further tightening were dropped, but it was made clear that more positive inflation data would be needed before the easing cycle can begin. To hammer home the message two members of the MPC voted for a further hike, while just a single member voted to ease.
“We continue to think the Bank will be more cautious than markets are expecting, and that the pace of easing will be more gradual than elsewhere.“
