BANK OF ENGLAND HOLDS RATES IN THREE-WAY SPLIT
Newsflash: The Bank of England has left UK interest rates unchanged, in a rare three-way split!
Bank Rate will remain at 5.25%, a 16-year high.
That will disappoint borrowers, such as mortgage holders, hoping to see a drop in borrowing costs today.
But it’s bang in line with City forecasts.
But, the decision is not unanimous … two members of the Bank’s Monetary Policy Committee preferred to increase Bank Rate by 0.25 percentage points, to 5.5%. One member preferred to reduce Bank Rate by 0.25 percentage points, to 5%.
The Bank says:
Six members (Andrew Bailey, Sarah Breeden, Ben Broadbent, Megan Greene, Huw Pill and Dave Ramsden) voted in favour of the proposition.
Three members voted against the proposition. Two members (Jonathan Haskel and Catherine L Mann) preferred to increase Bank Rate by 0.25 percentage points, to 5.5%. One member (Swati Dhingra) preferred to reduce Bank Rate by 0.25 percentage points, to 5%.
Key events
Closing post
Time for a recap.
The Bank of England has dropped the broadest possible hint that the next move in interest rates will be downwards after forecasting inflation will fall below 2% within months, despite keeping borrowing costs unchanged for a fourth consecutive time.
Threadneedle Street stressed that more evidence was required that inflation would stick at the target set by the government before the Bank could deliver a first cut to borrowing costs since the start of the pandemic. It warned that risks from fast-rising prices remained amid the cost of living crisis.
In a widely expected decision, the Bank’s monetary policy committee (MPC) voted by a majority to keep interest rates at the current level of 5.25%, the highest level since the 2008 financial crisis.
However, one member of the panel – the independent economist Swati Dhingra – pushed for an immediate reduction in borrowing costs, in a powerful signal to financial markets that the central bank was edging closer to taking action.
Two more policymakers, Jonathan Haskel and Catherine Mann – pushed for a further quarter-point increase in the Bank rate.
BoE governor Andrew Bailey said the recent falls in UK inflation were good news, but cautioned that the Bank needed to have more confidence that price rises would keep slowing, and stay low.
Bailey told reporters in London that inflation may rise a little in January, but is expected to then drop to the 2% target this spring, before rising again.
He said:
“We have had good news on inflation over the past few months. It has fallen a long way, from 10% a year ago to 4%. But we need to see more evidence that inflation is set to fall all the way to the 2% target, and stay there, before we can lower interest rates.”
Bailey also warned that the Bank couldn’t simply cut rates once inflation hits 2%, but explained that the bank has dropped its previous guidance that the next move in rates was more likely to be higher than lower.
Chancellor Jeremy Hunt banged this message home too, saying it was good news that interest rates have peaked.
Here’s the rest of today’s news:
For those partial to a chart showing economic metrics over decades here’s a look at the Bank of England base rate compared with inflation since 1975. The preferred measure of inflation changed in 1989. Pre 2008 it was the norm for base rates to be higher than inflation. pic.twitter.com/BHwRSQbbCu
— David Edwards (@ScattClouds) February 1, 2024
Over in the US, the number of Americans filing claims for unemployment support has risen to a two-month high.
The number of fresh ‘initial claims’ rose by 9,000 last week, to 224,000, new data shows,
Continuing claims, which tracks the number of people receiving unemployment benefits, rose to 1.9 million.
Bad news for the US economy: initial jobless claims rose to 224K, well above the forecast of 212K. This indicates a slowdown in the labor market recovery and a rise in unemployment. The Delta variant and supply chain disruptions are likely to blame. #joblessclaims #economy #USA
— Investor Notes (@investor_notes_) February 1, 2024
Markets see small chance of rate cut in March
The money markets are indicating that the Bank of England is very likely to leave rates on hold at its next meeting, in mid-March.
But, it suggests there is a 10%-ish chance of a cut – even though two policymakers vote for a rise at this week’s meeting, and only one for a cut.
Orla Garvey, Senior Fixed Income Portfolio Manager at Federated Hermes Limited, says Jonathan Haskel and Catherine Mann’s votes for higher interest rates seem ‘rather incongrous’:
“As expected, there was no change in UK monetary policy at this meeting of the Bank of England. Given that the voting split and the tone of the minutes were slightly dovish, the two votes for a hike seemed rather incongruous.
We were focused on changes in forecasts, specifically to wages and CPI, both of which have come lower. The press conference had a relatively balanced tone, nevertheless, we noted Governor Bailey’s comments around keeping the March meeting live.
Currently, a rate cut in March is priced at 12%.”
Hunt: Positive news that rates seem to have peaked
Chancellor Jeremy Hunt has said it is “positive news” that interest rates appeared to have peaked.
Speaking to reporters after the Bank of England held base rate at 5.25% today, Hunt said:
“It’s obviously very positive news for families with mortgages that interest rates appear to have peaked, but we should remember that inflation never falls in a straight line.”
The MPC maintained Bank Rate at 5.25% this lunchtime, while making something of a dovish pivot, in noting that the next move will be a cut, with focus now shifting to the duration for which rates will remain at their present level
Read the full article: https://t.co/G4mbzi7HjO pic.twitter.com/I5whoqykni
— Pepperstone (@PepperstoneFX) February 1, 2024
Bank of England interest rate decision: What the experts say
The Bank of England has sent three clear signals to markets that policymakers are shifting from a hawkish stance to a neutral one, says Kallum Pickering of Berenberg.
Those signals are the shifting balance of votes (one policymaker wanting a cut, while the number of votes for a rise fell from three to two); the removal of the guidance that the next move would probably be higher, and new forecasts showing inflation hitting 2% this spring.
Pickering adds:
This opens the door for rate cuts soon as long as inflation heads lower at a pace roughly in line with the BoE’s updated forecast. On the news, money markets continued to expect five 25bp cuts in 2024 with a first cut in Q2 – market participants are split on whether the first cut will come in May or June.
Gurpreet Gill, macro strategist at global fixed income at Goldman Sachs Asset Management, says the Bank remains cautious:
“The Bank of England removed its hiking bias but remains cautious on pivoting towards rate cuts. We continue to think the downtrend in inflation and subdued activity will see the Bank descend from its “table mountain” posture this spring, with rate cuts at subsequent meetings throughout the year.”
“With market pricing for UK monetary easing now converging to our outlook and the potential for looser fiscal policy presenting upside risks to bond yields, we are cautious on UK gilts.”
Paul Dales of Capital Economics predicts that rate cuts could come sooner than the BoE implies, saying:
While leaving interest rates at 5.25% for the fourth meeting in a row today, the Bank of England sent a signal that the next move will be a cut, but it pushed back strongly against the idea that rates will be cut soon or far.
Our forecast that inflation will fall further and faster than the Bank expects suggests it will change its tune in the coming months. A rate cut in June is still possible and we think rates will end 2025 at 3.00%. That’s lower than current market pricing of 3.25-3.50%.
Carsten Jung, senior economist at IPPR, warns that the Bank may act too slowly:
The fight against inflation is not yet over, but the end is in sight. This is largely due to global supply chains recovering and energy costs falling and not due to rising unemployment, as the Bank and most economists initially expected.
“Errors were made, regarding how we’ve been tackling inflation. There was too little focus on – and understanding of – the ripple effects of global shocks and too much attention on people asking for a pay rise. This matters because, as a result, the BoE tightened the screws too much. This will hurt the recovery. Similar to the US central bank, the Bank should reverse course and cut rates sooner this year.
“But even though inflation is coming down people’s incomes have still not caught up with the increased prices of the last years, with hundreds of thousands having newly fallen into destitution. More support is needed to support them. And we need more creative policy action to bring prices down, including on food and energy.”
Analysis: UK interest rates have peaked, the next move is down … but not yet
Larry Elliott
Interest rates have peaked. The next move in borrowing costs will be down. But not yet. Those were the three key messages from the Bank of England in its latest assessment of the state of the economy, our economics editor Larry Elliott writes.
Those conclusions may not be immediately apparent from the minutes of the latest meeting on Threadneedle Street of the monetary policy committee (MPC) – the body tasked with setting interest rates to hit the government’s 2% inflation target – because the MPC had a three-way split.
Six members voted to keep interest rates unchanged at 5.25%, two voted for them to rise to 5.5% while one voted for a reduction to 5%.
Video: Bank says ‘we’re heading in the right direction’ in battle against inflation
The Bank of England have released a video of governor Andrew Bailey explaining today’s decision to leave rates on hold.
In it, he makes some points we’ve already heard in today’s press conference:
We’ve held rates because, even though there has been good news on inflation, we need to be sure that it falls back to our 2% target and stays there sustainably.
That means we need to see more evidence that inflation will fall further, and stay low, before we are able to lower interest rates.
Bailey adds that we can’t yet declare victory in the battle against inflation, but insists “we’re heading in the right direction”.
Q: Is there a greater risk to waiting too long to cut rates, or from cutting too early?
That’s a judgement we look at each meeting, Andrew Bailey says, a little cagely.
But there is an important point – policy could still be restrictive even if rates were cut.
Q: How much of the previous tightening from the Bank of England is still to come through to the real economy?
About 30%, Andrew Bailey estimates. That’s down from around 50% estimated in November – partly because market interest rates have dropped, and partly because more time has elapsed.
Andrew Bailey is then bowled a tricky delivery about crypto – an area he’s been critical of in the past.
Q: How do you feel when you see two former chancellor of the exchequer being paid by the crypto industry? Are you concerned there is a “backdoor channel” of influence into UK policymaking?
[Reminder: yesterday we learned that George Osborne has been hired by the American cryptocurrency exchange operator Coinbase, following Philip Hammond who already chairs crypto firm Copper].
Bailey doesn’t directly address these moves by ex-chancellors. But he says there’s a difference between unbacked crypto, such as bitcoin, and stable coins. He still believes unbacked crypto has no intrinsic value, and is not money in any sense.
Stablecoins, though, purport to be money, so should be held to a higher standard, Bailey says.
