The Bank of England (BoE) has decided to maintain interest rates at a 15-year peak in its ongoing battle against high inflation. Despite calls for a rate cut, the central bank emphasized that it does not expect to lower rates in the near future.
This decision by the BoE had a slight impact on the stock market, with the FTSE 100 index slightly paring gains but still up 1.1% for the day. Meanwhile, the pound sterling saw a rise of 0.44% against the dollar after the announcement. Prior to the decision, it was trading around 0.35% higher. In the bond market, 10-year UK bond yields remained little changed from before the decision.
Economist Jeremy Batstone-Carr from Raymond James in France noted that although economic activity remains soft and inflation pressures persist, the fact that they are no worse than forecast contributed to the decision to hold interest rates steady. Batstone-Carr also highlighted that the rise in longer-dated government bond yields, influenced by global factors, has played a part in tightening financial conditions.
Looking ahead, Batstone-Carr suggests that the duration of this rate standstill is uncertain, but financial markets are anticipating a considerable period of stability. The Monetary Policy Committee (MPC) will continue to monitor fluctuations and risks in the coming months, leaving the door open for future rate hikes.
Peter Doherty, Director and Head of Investment Research at Arbuthnot Latham in London, acknowledges that the BoE faces a tougher path compared to other major central banks. He highlights that while economic data is cooling and the labor market is tight, inflation remains stubbornly high. Doherty believes the ability of the US Federal Reserve to raise interest rates relative to the BoE is limiting the strength of the pound against the dollar. He suggests that previous expectations of continued rate hikes by the BoE and cuts by the Fed may now be reversed.
Georgina Taylor, Fund Manager and Head of Multi-Asset Strategies at Invesco in London, argues that the BoE may need to be the first major central bank to move towards rate cuts as the economy deteriorates. She emphasizes the importance of focusing on the balance between growth and inflation. Taylor adds that the bond market, particularly gilts, is where the most value can be found, prompting her to increase exposure in that area.
Overall, the BoE’s decision to hold interest rates steady reflects the ongoing battle against high inflation, despite concerns about soft economic activity. The future trajectory of rates remains uncertain, with the central bank keeping a vigilant eye on market fluctuations and risks. As the economic landscape continues to evolve, the BoE faces a challenging path in determining the optimal balance between growth and inflation.
More detail via Investing.com here… ( Image via Investing.com )