The Bank of England has chosen to keep interest rates at a 15-year peak in their ongoing battle against rising inflation, reassuring the public that there are no immediate plans to reduce them. This decision comes as the UK faces the highest inflation rates among major developed economies. The bank’s efforts to combat inflation have proven successful, with longer-term government bond yields rising due to global factors, effectively tightening financial conditions.
The reaction in the market following the bank’s decision was relatively calm. The FTSE 100 index, while slightly affected, remained up by 1.1% on the day. Sterling also saw a positive response, with a 0.44% increase, trading at $1.2204, compared to $1.2193 prior to the bank’s announcement. Furthermore, benchmark 10-year UK bond yields experienced a small decline of 12 basis points to 4.383%.
Jeremy Batstone-Carr, a strategist at Raymond James, France, explained that the decision to maintain the interest rates was influenced by the fact that soft economic activity and inflationary pressures were no worse than initially forecasted. He also acknowledged that the rise in longer-term government bond yields, largely due to global factors, had relieved some of the pressure on the Monetary Policy Committee (MPC).
Peter Doherty, the Director and Head of Investment Research at Arbuthnot Latham in London, highlighted the challenging path ahead for the Bank of England. Although economic data is cooling and the labor market remains tight, inflation continues to pose a challenge. Doherty stated that in the short to medium term, the ability of the US Federal Reserve to increase rates relative to the Bank of England will constrain the value of the pound against the dollar. The previous expectation of continued rate hikes from the Bank of England, coupled with cuts from the Federal Reserve next year, may now be reversed.
Georgina Taylor, Fund Manager and Head of Multi-Asset Strategies at Invesco in London, expects the Bank of England to be the first major central bank to make rate cuts as the UK may have reached its peak rates. Taylor emphasized the need for the bank to focus on the mix of growth and inflation, considering the current deterioration of the economy. She also pointed out that gilts, or UK government bonds, offer the most value in the bond market and mentioned that her firm has added some exposure to them.
Overall, the Bank of England’s decision to maintain interest rates comes as no surprise, given the persistently high inflation rates experienced in the UK. While the market reaction was relatively subdued, experts differ on the future path of interest rates, with some suggesting that the Bank of England may be the first major central bank to make rate cuts in response to worsening economic conditions.
More detail via Daily Mail Online here… ( Image via Daily Mail Online )