Harvest Global Markets :

The Bank of England has opted to maintain its interest rates at a 15-year peak, persisting in its battle against rampant inflation that surpasses that of major economies worldwide. Despite grim forecasts indicating the British economy teetering on the edge of recession and projecting stagnation in the coming years, the Bank of England, or BoE, has decided to keep the Bank Rate steady at 5.25%. This decision follows 14 consecutive rate increases and stands as the second meeting in a row where rates remained unchanged.

The BoE emphasized its commitment to high borrowing costs, asserting that rates would stay elevated, although only about half of the impact from the prolonged period of rate hikes has yet been felt in the economy. The Monetary Policy Committee (MPC) voted 6-3 to maintain the Bank Rate, aligning with economists’ expectations in a Reuters poll. The BoE stated that its latest projections suggested that monetary policy would likely need to remain restrictive for an extended period. Further tightening in monetary policy would be necessary if evidence of persistent inflationary pressure emerged.

Governor Andrew Bailey emphasized that the decline in inflation over the past year and the weaker economic outlook should not be construed as indicators for imminent rate cuts. Instead, another rate hike appeared a more plausible scenario, emphasizing the need for inflation to steadily approach the 2% target before considering any rate reductions.

This decision to maintain rates mirrors recent moves by the European Central Bank and the U.S. Federal Reserve, both awaiting the impact of their robust rate hikes on the world’s most severe inflation outbreak in decades. Policymakers are also vigilantly observing the conflict in the Middle East, which could potentially trigger a new wave of higher inflation due to rising oil and gas prices.

Despite the BoE’s determination to counter a detrimental cycle of escalating wages and prices, inflation, while having decreased from its peak, remains more than three times the BoE’s 2% target. The central bank anticipates the UK economy to have stagnated in the July-September period, with a meager growth of 0.1% projected in the fourth quarter. For the years ahead, the forecasts indicate minimal expansion, with a growth of just 0.25% expected in 2025. However, even with these projections, inflation is projected to only return to the 2% mark by the end of 2025, approximately six months later than previously forecasted.

Investors are now betting that the BoE has reached the culmination of its rate hikes due to the looming risk of recession. Forecasts, based on the market’s pricing for Bank Rate in the future, suggest inflation might subside to its 2% target within two years. The slowing economy and the diminishing impact of last year’s surge in gas prices are likely to lead to a resumption in the fall of inflation. However, the BoE remains vigilant about robust wage growth, fearing it might reignite inflation.

In its otherwise subdued evaluation of the economy, the BoE’s prediction of a 4.6% inflation rate in the fourth quarter of 2023 is likely to be welcomed by Prime Minister Rishi Sunak. This prediction aligns with Sunak’s pledge to voters, indicating price growth ahead of the anticipated national election in 2024.