Bank of England leaves interest rates at 15-year high, says it's 'much too early' to think about cuts

In May 2023, a person from the general public is strolling through a downpour nearby the Bank of England.

A section of a blog was written and it featured a photo taken by Dan Kitwood that was published in Getty Images News.

On Thursday, the Bank of England chose to maintain the current interest rates and made an announcement that the monetary policy would need to remain stringent for a prolonged period.

The group responsible for monetary policy, known as the Monetary Policy Committee, has made a decision about the main bank rate. The vote was 6-3, meaning that the majority chose to keep the rate at 5.25%. However, there were three members who wanted to increase the rate by 25 basis points, bringing it up to 5.5%.

At the start of Thursday, the probability of the bank maintaining its current policy for two continuous times was around 89%, as mentioned in LSEG data. This decision came after the bank's decision to stop increasing rates for the first time in fourteen straight hikes back in September.

In their statement on Thursday, the MPC shared that their most recent estimates suggest that monetary policy will probably require ongoing constraints. If they detect signs of enduring inflationary forces, they may need to tighten monetary policy even further.

The committee's previous forecasts from October showed a decline in inflation to 6.7%, but it still surpasses the central bank's goal of 2%. At the same time, economic activity has reduced significantly, and the job market reveals indications of weakening.

On Thursday, Andrew Bailey, the Governor of the Bank of England, stated that although inflation has shown improvement, we cannot become complacent because it is still excessively high.

Bailey stated that they will maintain interest rates at a high enough level for a considerable amount of time in order to reach the desired inflation rate of 2%. While monitoring the situation, they may consider increasing the interest rates further. Even if it's not necessary, it is too soon to contemplate decreasing the rates.

The committee mentioned in their Monetary Policy Report that inflation was not quite as high as they had thought back in August. They predict that the consumer price index will hover around 4.75% in late 2023, before decreasing to roughly 4.5% in early 2024, and then down to 3.75% in mid-2024.

The economy of the United Kingdom is predicted to have remained stagnant during the third quarter of 2023, which is not as strong as the projections made by the MPC in August. Furthermore, instead of the initial forecast, the GDP is now expected to only grow by 0.1% in the fourth quarter of the same year.

The MPC stated that there hasn't been much new information regarding the important signs of U.K. inflation persistence since their last decision. However, they did note that there have been some indications of the tighter monetary policy affecting the labor market and the overall real economy momentum.

The statement emphasized that monetary strategies must be restrictive enough for a considerable length of time in order to achieve a sustainable return to the 2% inflation target.

'Reached Peak Rates'

With these current circumstances, many experts immediately proposed that the bank will no longer increase interest rates. Emma Mogford, who manages the Premier Miton Monthly Income Fund, expressed her strong belief that we have reached the highest point of interest rates.

In an email, she declared that the swift rise in interest rates observed during the past year will persistently lessen the interest in commodities and amenities, thus lowering the rate of inflation. She also mentioned that the Bank of England anticipates that the inflation rate will reach 2% in a span of two years.

If the economy can remain strong and yet inflation decreases, this would be beneficial for the UK stock market.

Sam Zief, who leads global FX strategy at JPMorgan Private Bank, stated his agreement with the notion that the MPC will stay put for some time, but he added that he expects the next course of action to be a reduction in interest rates. Zief also made reference to "Table Mountain" in relation to the long-awaited decision from the MPC.

According to Suren Thiru, who works as the economics director at ICAEW, the decision made on Thursday and the rise in the number of MPC members who voted to maintain the status quo, as opposed to the slim 5-4 divide seen in September, demonstrates that interest rates have hit their highest point.

Even though the current cycle of increasing interest rates might have ended, the delayed effects of past tightening measures imply that the extended pressure on individuals with mortgages, companies, and the overall economy is still ongoing, as noted by Thiru in an email communication.

As the Bank of England predicts a further deterioration of the economy, it is highly probable that the argument for reducing interest rates will become stronger.

Economy At Risk: "Knife Edge"

The Chancellor of the Exchequer in the United Kingdom, Jeremy Hunt, said on his own that the country has managed to endure better than what most people predicted. However, the most effective method to achieve abundance is by developing growth that is long-lasting.

According to him, the Autumn Statement will explain our strategy for enhancing economic growth by facilitating private investments, providing more job opportunities for the citizens, and creating a more efficient government in Great Britain.

On Wednesday, the Federal Reserve of the United States maintained rates at their current level and enhanced their evaluation of the economy. Jerome Powell, the Chairman of the Federal Open Market Committee, asserted that they are not currently deliberating on reducing rates.

Despite his intentions, the markets perceived his statements during the news conference as less aggressive and assumed that the Fed would no longer continue raising interest rates. This caused a significant decrease in short-term U.S. Treasury yields, and this effect spread throughout Europe and the U.K. The result was an increase in stock markets throughout these regions.

The returns on gilts, which are 2-year bonds issued by the U.K. government, fell to their minimum level in comparison to June in anticipation of the announcement from the Bank of England that is due on Thursday. When the cost of the bonds goes down, the yields increase.

According to Michael Field, who is a higher-up person in the stock market analysis company Morningstar, the bank's choice might provide a bit of comfort to traders. However, he thinks that any good feelings about this situation have already been overshadowed by the excitement surrounding some recent news from the United States.

The state of the U.K. economy is precarious, much like the rest of Europe. It's not really growing and inflation rates remain high. While the job market is competitive, wages aren't meeting the rise in inflation. The person sending the email said they could only hope that inflation would keep dropping rapidly, which would allow the Bank to begin reducing interest rates.