Bank of England hits the brakes

21 September 2023

In a surprise move, the Bank of England (BoE) has decided to pause its recent run of rate rises, opting to keep the base rate on hold at 5.25%. 

It brings the curtain down on an historic hiking cycle, that had seen 14 consecutive rises before September’s Monetary Policy Committee (MPC) meeting. 

The decision will be welcome news for homeowners, businesses and borrowers, many of whom have borne the brunt of the central bank’s efforts to dampen soaring domestic inflation.

However, there was also a warning that the UK can ill afford to celebrate too early. The potential of a recession was cited by policymakers as one of the reasons why a 15th straight hike had been ruled out. 

Peak inflation?

Only days before the MPC convened, it was revealed that UK inflation had fallen more sharply than many people had anticipated. The Office for National Statistics released its latest data showing the consumer prices index falling to 6.7% (down from 7.9% in June), largely driven by falling food prices. The drop came despite the return of rising global oil prices – an event typically seen as a catalyst for inflation. 

Going into their meeting, MPC voting members had a difficult decision to make – did they want to increase rates again despite the risk of a UK recession, in case inflation hadn’t been sufficiently quashed? Or had they seen enough positive signs in the most recent data, and did the risk of recession weigh too large on their minds, to merit keeping rates on hold? 

In the end, they opted for the latter, with the decision passed by a 5-4 vote. The tight voting split was further evidence of the challenging reality under discussion. 

Celebrations on ice

While the rate pause is good news for borrowers, there was also a reality check delivered in the MPC’s official statement. Policymakers were keen to stress that the pause was temporary, and that rates could go up again if future inflation data called for it. At 6.7%, current inflation remains more than three times above the BoE’s target of 2%. 

“The MPC will continue to monitor closely indications of persistent inflationary pressures and resilience in the economy as a whole, including the tightness of labour market conditions and the behaviour of 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 line with the Committee’s remit. Further tightening in monetary policy would be required if there were evidence of more persistent inflationary pressures.1

Where next? 

By opting against another rate rise, the BoE has followed in the footsteps of its transatlantic peer, the US Federal Reserve, which kept its own target rate at 5.25-5.5%. Both central banks have seen enough signs – at least for now – to suggest that the inflation battle doesn’t need to be as intense. 

The BoE also announced its decision to dramatically reduce the size of its balance sheet, in an effort to free-up capacity for any future financial stability measures that might be needed. Starting from October, it intends to spend 12 months cutting its gilt portfolio by £100 billion to £658 billion. This looks likely to be achieved through a 50-50 split of active sales and maturing assets.  

What does it mean for investors? A period of uncertainty awaits, as policymakers and market participants assess whether the central bank has eased off the accelerator too early, or not. 

Our current expectation is for UK rates to start falling at some point in 2024, as growth remains subdued but inflation moderates. 

As always, the investor message remains: to get invested and stay invested. Clearly the need for proper diversification is also increasing. Thankfully, the short-term outlook will soon be yesterday’s news, and then invested assets should show their value as a long-term tool in sound financial planning.

Please note: Watch this space for our Outlook 2024 report, launching in mid-November. Amongst other things, we’ll be assessing the prospects for the UK economy and its investors. 

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