No surprises from today's interest rate decision from the BoE

No surprises from the Bank of England (BoE) today, with rates left on hold and Governor Bailey commenting that there is “still some way to go” in the fight against inflation. The Monetary Policy Committee (MPC) instead took the opportunity to actually downplay the recent progress that has been made in bringing down CPI, instead choosing to repeat its overall view that monetary policy is likely to remain in restrictive territory for some time to come yet, this message being backed up by 3 of the 9 MPC members voting to raise interest rates by a further 25bps.

Clearly the Committee feels that the risks to CPI continue to be skewed to the topside and that an extended period of tighter policy is therefore justified; yesterday’s weak growth numbers appear not to be influencing the Committee at all in its determination to bring CPI back to target. Indeed, there is no suggestion of any dovish pivot at all in the language used today. This is in stark contrast to the message from the Fed yesterday, where Chair Powell said that the FOMC was very much focussed on the potential harm to growth an extended period of restrictive policy could cause.

The strength of underlying price pressures clearly remains a big concern for the MPC, which noted that wages growth remains higher in the UK than in either the US or the euro-zone and that the risk of wages rises continuing to run at a level incompatible with a 2% CPI target remains significant. Wages growth clearly is a major concern preventing any suggestion that we getting close to seeing a pivot, a concern that has not been helped by the government’s decision in November’s Autumn Statement to increase the National Minimum Wage next year by 9.8%, potentially triggering a round of price rises as employers look to recover this cost.

Today’s message was clearly an attempt to push back on the expectations that had been growing in the market concerning how soon the MPC might deliver a first interest rate cut; some of the recent exuberance that had been seen in the Gilt market, particularly in the short end, is likely to have been tempered by today’s decision. It also highlights the growing gap between the BoE and the Fed/ECB, where the BoE is increasingly lagging its peers in terms of how soon monetary policy might be eased. The 6-3 vote split clearly highlights the strong concerns among some Committee members regarding how close the BoE yet is to getting inflation finally back under control.

For the UK government it is also not particularly good news. Clearly the MPC did not allow yesterday’s weak growth numbers to detract at all from its determination to bring CPI back to target, meaning the government could be fighting the next general election – required at the latest by January 2025 – against a back-drop of at best sluggish growth or at worst an economy that is in recession. The BoE at its November MPC meeting put the chances of a recession at 50/50 – based on the data we have received since then that chance has probably increased. And this may well partly explain its continued hawkish stance today: it will need to be sure that the government does not relax fiscal policy in the March Budget in an attempt to boost its election chances before it will consider relaxing its own monetary stance.