'Tough Call': MPC Divided as BoE Holds Interest Rates

In a close call, the Bank's Monetary Policy Committee opted to hold interest rates at 5.25%, but that could change at the next meeting in November

Ollie Smith 21 September, 2023 | 12:27AM
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Andrew Bailey

The Bank of England (BoE) has opted to hold interest rates at their current level of 5.25% after its nine-strong Monetary Policy Committee (MPC) voted five-four in favour of no action.

In a statement published online, the BoE said it was also reducing its stock of UK government bond purchases.

"At its meeting ending on 20 September 2023, the MPC voted by a majority of five–four to maintain Bank Rate at 5.25%," the BoE explained.

"Four members preferred to increase [the] bank rate by 0.25 percentage points, to 5.5%. The Committee also voted unanimously to reduce the stock of UK government bond purchases held for monetary policy purposes, and financed by the issuance of central bank reserves, by £100 billion over the next twelve months, to a total of £658 billion."

It added it now expects inflation to fall further in the coming weeks and months. On Wednesday this week, inflation figures for August had shown a surprise cooling of price rises.

Annually, consumer prices had risen by 6.7% in August, easing from a 6.8% rise in July. August's reading undershot market forecasts, as cited by FXStreet, which predicted inflation would heat up to 7.1%.

"CPI inflation is expected to fall significantly further in the near term, reflecting lower annual energy inflation, despite the renewed upward pressure from oil prices, and further declines in food and core goods price inflation," the BoE said today. 

"Services price inflation, however, is projected to remain elevated in the near term, with some potential month-to-month volatility."

A further decision on interest rates will be made on November 2, when the BoE will announce the results of its next MPC's next meeting.

Mixed Reactions

Commentators have greeted the news with a mixture of economic optimism and relief for households, who have felt the impact of price rises keenly, alongside much higher borrowing costs.

Hussain Mehdi, macro and investment strategist, HSBC Asset Management, said the decision had been a "very tough call". 

"This was a very tough call for the MPC, which is reflected in the five-four vote split. The surprise dip in August inflation and clear signs that that the UK economy is creaking under the pressure of higher rates are likely to have triggered a more dovish inclination among BoE policymakers.  

"We believe there is now a good chance that the bank rate has peaked – a view we share for both the Fed and European Central Bank (ECB) policy rates. Although the latest UK pay growth numbers are a cause for concern, labour market data is lagging. Forward looking indicators suggest the UK economy is already flirting with recession, a backdrop consistent with cooling wage growth and a policy pivot.

"For us, we believe ongoing restrictive policy settings indicate there is a strong likelihood of developed markets entering recession in 2024. Amid market pricing of a “soft landing” scenario, this is consistent with a cautious and defensive positioning in portfolios. Nevertheless, the FTSE 100 may find some insulation from its defensive characteristics, decent valuations, and energy exposure in an environment of rising oil prices. 

Rob Morgan, chief investment analyst at Charles Stanley, said this week's inflation figures had been a "filip" for BoE.

"Yesterday’s lower-than-expected inflation reading was a fillip for the Bank of England," he said.

"Alongside the cracks starting to show in the economy and weakness starting to creep into the jobs market it provided evidence price rises are starting to return to the trajectory the Bank is happy with. 

"Borrowers will breathe a sigh of relief, but the cycle of raising rates may not be quite at an end. The BoE is conscious of going too far and inflicting more pain than necessary on the economy, but ultimately its primary job is to bring inflation back down, which means one more rate rise is possible before they plateau into next year to ensure rising prices are kept in check."

Chris Beauchamp, chief market analyst at trading platform IG Group, said CPI figures had "tipped the balance" of the UK's fight against inflation.

"It looks like yesterday’s CPI reading really did tip the balance for the BoE – though it notes inflation will continue to fall, the MPC has echoed the Fed in saying policy will remain restrictive long enough to get inflation back to target," he said.

"Notably, they also think inflation will fall despite the strength in oil prices, so the next few CPI readings will be key to see if this prediction bears fruit."

Richard Garland, chief investment strategist at Omnis Investments, said the MPC's "doves" had won out.

"The Bank appears to have concluded that monetary policy is tight enough already to stem strong wage growth given weakness emerging elsewhere in the labour market, sufficient to bring inflation back to target," he said.

"This week’s better-than-expected inflation print possibly helped with the BoE’s decision to not hike today. There were doubtless conflicting views but in the end the doves' observation that previous tightening has still to affect the economy – already weakening – seems to have won out. The MPC still refers to its flexibility to react should things change, but the chances are this could be the peak in this UK interest rate cycle."

The Beginning of The End?

But one voice urged some caution. Hugh Gimber, global market strategist at J.P. Morgan Asset Management, said it was "risky" to conclude the BoE’s rake hike mission was now over.

"What a difference a data point makes," he said.

"Ahead of this week’s inflation print, a 25 basis point hike to UK interest rates was largely assumed as a done deal, with signals from the labour market in particular highlighting that more pressure on the economic brakes was required.

"Yet in light of today's decision to hold rates stable, it seems that easing price pressures in the services sector have done enough to tilt the MPC away from further action. Despite efforts in the statement to keep the door open to further hikes, many investors will now assume that the BoE's hiking cycle has concluded.

"We see two key risks to this view. In terms of the domestic picture, the recent easing in services inflation was primarily driven by seasonal factors linked to airfares and hotel prices. While the Bank will now be hoping that this cooling broadens to other parts of the economy, strong wage pressures stemming from structurally tight labour markets make this far from assured. The 25% rally in oil prices since mid-year is another watch item, given the way that it could offset lower domestic energy prices in the months ahead.

"With every step higher in interest rates, recent communication has highlighted that the risk of overtightening has become a greater factor in the Bank’s decision making process.

"Unfortunately, some weakening in activity is unavoidable in order to put the inflation genie back in the bottle. The risk of today’s decision is that the Bank may yet be forced to apply the brakes more sharply at a later stage."

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Ollie Smith

Ollie Smith  is editor of Morningstar UK

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