The Bank of England held interest rates at 5.25% in its final meeting of the year, in line with market expectations. Its monetary policy committee voted 6-3 in favour of keeping rates steady, as it did in November, with three members voting for a 25 basis point rise to 5.50%.
This decision comes amid a stock and bond market rally after the Federal Reserve indicated last night that it would begin cutting interest rates in 2024. The so-called “Fed pivot” has upgraded expectations for central bank rate cuts next year.
Given that the Bank’s quarterly economic forecasts were released just a month ago, there are few dramatic changes in the statement released today. Still, it predicts that CPI inflation will be softer in the coming months than predicted in November, helped by declines in energy prices. November CPI figures will be released on Wednesday, December 20 and the number is expected to decline further from the 4.6% rise seen in October.
Still, it’s far from mission accomplished in the fight against inflation. The Bank says that “key indicators of UK inflation persistence remain elevated” such as wage growth and services price inflation.
Those hoping for a “BoE pivot”, especially homeowners switching on to new mortgage deals, may be disappointed by the Bank’s ongoing caution: “The MPC will continue to monitor closely indications of persistent inflationary pressures and resilience in the economy as a whole, including a range of measures of the underlying tightness of labour market conditions, wage growth and services price inflation. Monetary policy will need to be sufficiently restrictive for sufficiently long to return inflation to the 2% target sustainably in the medium term.”
In November, the Bank said rates will have to remain "high enough for long enough" to make sure inflation is beaten. As such, we predicted earlier this week that the decision would be to hold.
We’ve also collated investment bank predictions for 2024, with most anticipating cuts next year. Goldman Sachs AM expect these as early as February or March next year, while Bank of America doesn’t forecast cuts until 2025.
What the Market Says
Jeremy Batstone-Carr, European strategist, Raymond James Investment Services, says: “The MPC may enact a change in course come 2024, though the lagged impact of earlier rate hikes will still be making their way through the economy, likely leading to flatlined activity for most of the new year before a partial upturn.”
Rachel Winter, partner and investment manager at Killik & Co, notes that the BoE’s decision, alongside the Fed, will be taken as a positive sign by investors and consumers. With rates now expected to fall, investors should start to think about how to best capitalise on this.
“Falling interest rate environments have historically been good news for both equities and bonds. More generally, a new year is a great time to review investment portfolios and make sure they have exposure to promising themes such as artificial intelligence and energy efficiency,” she says.
Susannah Streeter, head of money and markets at Hargreaves Lansdown, adds: “All eyes will be trained on jobs and wage growth, and weakness in either could be the canary in the coalmine for the economy, which has been sustained by robust spending. If we get more weakness than is currently expected, that might encourage the Bank of England to cut rates sooner.”
Meanwhile, Mark Taheny, senior director at corporate finance advisor Centrus, comments that held rates are unwelcome news for highly geared businesses especially, which will soon need to refinance in order to free-up equity or raise capital.
“With sustained high interest rates, refinancing terms remain unfavourable as debt structuring decisions become more complex and urgent by the day,” he says. “This does not relate to existing debt exclusively – any company looking to grow needs to spend, and with Net Zero pressure looming larger by the day, many firms will need to invest in green technology and infrastructure in the coming months.”
Richard Garland, chief investment strategist at Omnis Investments, comments on today’s MPC decision: “Recent big moves in bond yields will have reinforced the MPC’s desire to push back on the market’s increasingly aggressive bets for rate cuts in 2024, but this rate decision was a non-event. With the Fed turning more dovish it’s going to be hard to maintain appropriate market pricing for rates, so expect more forward guidance and focus on sticky services and wage inflation.”
