The final Bank of England meeting of 2023 is likely to be low-profile.
For one, there won't be a Monetary Policy Report (MPR) attached to the decision and the market consensus is for no change to interest rates. This would make it the third meeting in a row the Bank has held rates – in the last month, six members of the monetary policy committee voted to keep interest rates at 5.25%, while three voted for a 25 basis points increase to 5.50%. The split this month will be keenly watched for those trying to extrapolate future moves in 2024.
When Will The Bank of England Cut Rates?
In November's meeting the Bank said rates will have to remain "high enough for long enough" to make sure inflation is beaten. There's certainly been no hint from the MPC that rates are now likely to come down. Inflation is falling sharply, according to the latest data – and the November consumer price index (CPI) reading will come a day before the Bank announces its decision. But the governor was keen to stress to MPs that the market, which is anticipating rate cuts in early next year, is "putting too much weight on the current data releases".
The Bank was criticised for being too slow to react to burgeoning inflation in 2022, so it's unlikely to be in a hurry to claim victory against price rises, which were running at 11% a year on year at one point.
How Long Does it Take For Rate Rises to 'Bite'?
Another key factor is what fiscal policy has been doing this year. Mindful of next year's election, chancellor Jeremy Hunt brought forward a package of tax cuts at the Autumn Statement this November. Tax cuts are often inflationary, as consumers (in theory) like to spend the extra money at the end of each month. News headlines about falling inflation, although perhaps not reflected yet in retail prices, may also be having an effect. For their part, higher rates drag in the opposite direction, slowing consumption and spending.
Meanwhile, some investment banks in their 2024 outlooks even think the Bank of England won't be comfortable cutting rates until a recession occurs. That's a sobering message for those with mortgages; yes, rates will come down, but only when the economy is really struggling.
The other factor is "transmission", the real-world impact of policy changes on consumer behaviour; economists talk of a minimum 12-month lag before rate cuts really start to "bite". With rates having gone from 0.1% in December 2021 to 5.25% in August 2023, there is arguably still plenty of tightening still to take effect.
Our special report article this week looks at what the Bank is likely to do in 2024 and 2025. Invesment bank forecasts vary: some expect cuts as early as February, the first MPC meeting of 2024, while others are postponing cuts until 2025. There's even the prospect of further rate hikes on the cards.
Of the central banks deciding this week, the Bank of England could appear more hawkwish than others. In a note, UBS says: "given the strength of wage growth in the UK, we think the BoE has more credibility in continuing to send a 'higher for longer' message than its counterparts in other developed countries."
