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Bank of England Holds Interest Rates at 15-Year Peak, Expects Restrictive Policy to Continue

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Bank of England Holds Interest Rates at 15-Year Peak Amidst Inflation Concerns

The Bank of England (BoE) has decided to maintain interest rates at a 15-year peak, signaling its determination to combat soaring inflation despite concerns about the British economy. In a move that caught the attention of economists and investors alike, the BoE emphasized its intention to keep borrowing costs high, citing the need to alleviate inflationary pressure.

This decision comes as the British economy faces the possibility of a recession and sluggish growth in the coming years, as revealed in recently published forecasts. Despite these concerns, the BoE has held the Bank Rate steady at 5.25% for the second consecutive meeting, following a series of 14 consecutive rate hikes.

The Monetary Policy Committee (MPC) voted 6-3 to maintain the benchmark rate, aligning with the expectations of economists surveyed by Reuters. In a statement, the BoE stated that its latest projections indicate a prolonged period of restrictive monetary policy, adding that further tightening might be necessary if inflationary pressure continues.

Governor Andrew Bailey reinforced this stance, cautioning against premature assumptions of rate cuts. Bailey stated, “We need to see inflation continuing to fall all the way to our 2% target.” He further emphasized that it is too early to consider rate reductions and that the bank will closely monitor the need for potential rate increases.

The decision to keep rates unchanged aligns with recent moves by the European Central Bank and the U.S. Federal Reserve. Both institutions are also evaluating the impact of their rate hike policies on curbing inflation.

Yael Selfin, chief economist at KPMG UK, described the BoE’s decision as a “hawkish hold.” Selfin expects the bank to adopt a more accommodative policy towards the end of next year.

Amidst concerns about inflation, policymakers are keeping a close watch on the Middle East conflict, as it could lead to a fresh surge in oil and gas prices, further exacerbating inflationary pressures.

In terms of inflation, although the rate has decreased from its peak of 11.1% a year ago to 6.7% in the most recent data, it still exceeds the BoE’s target of 2%. The central bank projects a flatlining economy in the July-September period, with meager growth of 0.1% in the fourth quarter. Furthermore, the forecast for 2024 predicts zero growth, with a slight expansion of 0.25% in 2025. Even with these projections, it is estimated that inflation will only return to 2% by the end of 2025, approximately six months later than previously anticipated.

Market investors believe that the BoE’s rate hike cycle has reached its conclusion, given the perceived risk of a recession. Prior to the announcement, investors were betting on interest rates remaining unchanged until at least August 2022, with potential rate cuts afterward.

Despite these expectations, the BoE’s forecasts align with market expectations, indicating that inflation will reach the 2% target in two years’ time based on the market’s pricing for Bank Rate.

While the BoE predicts a slowdown in the economy and a decrease in inflation due to the waning impact of last year’s gas price surge, it remains cautious about strong wage growth, which could fuel inflation further. The bank highlighted “increasing uncertainties” regarding official labor market data, noting that jobs growth may be weaker than previously estimated and that wage growth is expected to taper off.

The BoE also forecasted that the unemployment rate would rise to 5% within two years, based on the market’s predicted path for interest rates.

Notably, the BoE’s forecast of 4.6% inflation in the fourth quarter of 2023 aligns with Prime Minister Rishi Sunak’s pledge to voters to achieve price growth this year. This prediction could bolster Sunak’s position ahead of an anticipated national election in 2024.

Overall, the BoE’s decision to maintain interest rates at their current high level reflects the bank’s determination to tackle inflation, despite concerns about the economy. With inflation still exceeding the target and uncertainties surrounding wage growth and the labor market, the BoE will continue to monitor the situation closely to ensure price stability in the long term.

More detail via Reuters here… ( Image via Reuters )

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