BoE keeps rates on hold as growth fears start to weigh

The rising fear of recession is increasingly weighing on the BoE's decision making

By Stuart Cole | @Stuart Cole | 21 September 2023

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The Bank of England (BoE) delivered today what the market had been increasingly expecting following yesterday’s softer CPI numbers, ie a no change decision on interest rates but with the threat of further hikes left on the table if inflation does not continue to recede as expected. The vote was close, 5-4, suggesting that the decision not to raise rates was marginal and probably predicated on the softer August CPI print. The statement accompanying today’s decision was broadly the same as the statement from the August meeting, making it hard to gauge the BoE’s reaction function for the final two meetings of the Monetary Policy Committee (MPC) this year, to be held in November and December. Further, the fact that the decision by the 5 members who opted to keep rates on hold was reported as “finely balanced” suggests it will not take much for them to vote for further hikes going forward if deemed necessary.

In this vein, the BoE was keen to stress that today’s decision does not mean that further interest rate rises can be ruled out. It stressed that further tightening will be delivered if inflation does not fall back as expected and that, even if policy is not ultimately tightened further, it does not mean any potential easing is yet on the horizon: policy will remain restrictive enough for a sufficiently long period of time to ensure inflationary pressures do not start to build again. In many ways the BoE has delivered the same message as the FOMC yesterday and puts both central banks at odds with what is happening in Europe, where the ECB and several European central banks have continued to raise interest rates further this month.

But while today’s decision will be welcomed by the likes of mortgage holders and borrowers generally, it is not necessarily all good news. Even though yesterday’s CPI figures came in softer than expected, the rate of inflation is still over three times its official 2% target, suggesting that the rising fear of recession is starting to increasingly weigh on the MPC’s thinking. It is also interesting to note that of the four MPC members who voted to hike rates, three - Greene, Haskel and Mann - are external members, while the fourth – Cunliffe - is an internal member but who leaves the MPC later this year. It raises the question of whether political considerations are also starting to influence BoE decision making, given the extreme level of where interest rates are at, as it will be the BoE’s internal MPC members who will feel the heat more keenly of any negative fallout from a decision to tighten policy further. Green, Haskel and Mann are largely free of this consideration and potentially more willing to take the hard decisions needed to return CPI back to target.

Following today’s decision, the market is now pricing in an approximate 38% chance of rates being raised further in November. However, with the case for hiking in November and December unlikely to be any stronger than today, the implication is that the MPC is probably done and that the terminal rate in this hiking cycle has now been reached.

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The case for hiking in November and December is unlikely to be any stronger than today, suggesting that the BoE is now probably done and that the terminal rate in this hiking cycle has been reached.