The Bank of England has decided to maintain interest rates at a 15-year high as it continues its battle against the highest inflation among the world’s major economies. The Bank Rate, which has remained at 5.25% for the second consecutive meeting, comes after 14 consecutive rate increases. The bank also released forecasts indicating that the British economy is on the brink of a recession.
The news prompted a positive reaction in the markets, with Britain’s benchmark FTSE 100 index rising by 1.26% on the day. Sterling also saw gains, with the currency trading around 0.5% higher at $1.2208. However, it dropped against the euro, which increased by 0.37% to 87.31 pence. Additionally, benchmark 10-year UK bond yields fell 16 basis points to 4.33%.
The Bank of England’s decision has drawn mixed responses from market experts. Geoff Yu, Senior EMEA Market Strategist at BNY Mellon, commented that the bank is likely frustrated that it has not made more progress in combating inflation. He also noted that the moves in bond markets have already had a positive impact on the economy. Althea Spinozzi, Senior Fixed Income Strategist at Saxo Bank, warned that the bank’s forecasts suggest stagflation and hinted that a rate cut may be the next step. However, she cautioned that if inflation rises again, the bank’s credibility could suffer.
Ed Hutchings, Head of Rates at Aviva Investors, acknowledged that weaker growth should be expected due to the lagged effects of past interest rate hikes. Dario Perkins, Managing Director of Global Macro at TS Lombard, stated that central banks worldwide are desperate to stop tightening and that interest rate cuts may be on the horizon. Samuel Zief, Head of Global FX Strategy at J.P. Morgan Private Bank, highlighted that data since the last meeting did not meet the threshold for further tightening, suggesting that the next move for the Bank of England will be to lower rates.
The Bank of England’s decision aligns with the recent stances taken by the US Federal Reserve and the European Central Bank, both of which have chosen to keep rates on hold. Chris Beauchamp, Chief Market Analyst at IG Group, noted that the bank’s caution is similar to that of the Federal Reserve, and while rate cuts are currently off the table, the bar for another rate hike has been raised. Morningstar’s Senior Equity Strategist, Michael Field, described the announcement as a small relief for markets, but noted that the euphoria surrounding the US Federal Reserve’s decision to halt rate increases has overshadowed the news.
Jeremy Batstone-Carr, Strategist at Raymond James, stated that the Bank of England’s decision is a result of soft economic activity and persistent inflationary pressures. He also highlighted that the rise in longer-dated government bond yields has tightened financial conditions, which has aided the Monetary Policy Committee in their decision-making. Peter Doherty, Head of Investment Research at Arbuthnot Latham, outlined the challenges facing the Bank of England, including cooling economic data, a tight labour market, and sticky inflation.
Georgina Taylor, Fund Manager and Head of Multi-Asset Strategies at Invesco, argued that the Bank of England may need to be the first major central bank to cut rates as the economy deteriorates. She also noted that gilts offer the most value in bond markets at present.
In conclusion, the Bank of England’s decision to keep interest rates at a 15-year high is aimed at combatting inflation. While the announcement was met with positive reactions in the markets, experts remain divided on the future direction of interest rates. The bank’s decision aligns with the current stance of other major central banks, and the next move is uncertain, with some suggesting that a rate cut may be on the horizon.
More detail via Daily Mail Online here… ( Image via Daily Mail Online )