Bank of England ends run of 14 straight interest rate hikes after cooler-than-expected inflation

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A passageway near the Bank of England (BOE) in the City of London, U.K., on Thursday, March 18, 2021.
Hollie Adams | Bloomberg | Getty Images

LONDON — The Bank of England on Thursday ended a run of 14 straight interest rate hikes after new data showed inflation is now running below expectations.

The Bank had been hiking rates consistently since December 2021 in a bid to rein in inflation, taking its main policy rate from 0.1% to a 15-year high of 5.25% in August.

The British pound dropped 0.7% against the U.S. dollar shortly after the decision.

The Monetary Policy Committee voted 5-4 in favour of maintaining this rate at its September meeting, with the four members preferring another 25 basis point hike to 5.5%.

“There are increasing signs of some impact of tighter monetary policy on the labour market and on momentum in the real economy more generally,” the Bank said in a statement.

“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.”

The MPC also unanimously votes to cut its stock of U.K. government bond purchases by £100 billion ($122.6 billion) over the next 12 months, to a total of £658 billion.

Investors on Wednesday ramped up bets that the Bank would pause its interest rate hiking cycle after U.K. inflation came in significantly below expectations for August.

The annual rise in the headline consumer price index dipped to 6.7% from the 6.8% of July, defying a consensus forecast that it would rise to 7%, as easing food and accommodation prices offset a hike in prices at the pump. Notably, core CPI — which excludes volatile food, energy, alcohol and tobacco prices — dropped to 6.2% from July’s 6.9%.

Early Thursday morning, money markets were split roughly 50-50 on whether the Bank would pause or opt for another 25 basis point hike, according to LSEG data, before swinging back to 60-40 in favor of a hike in the hour before the decision.

“Inflation is falling and we expect it to fall further this year. That is welcome news,” Bank of England Governor Andrew Bailey said in a video statement.

“Our previous increases in interest rates are working, but let me be clear that inflation is still not where it needs to be, and there is absolutely no room for complacency. We’ll be watching closely to see if further increases are needed, and we will need to keep interest rates high enough for long enough to ensure that we get the job done.”

Job ‘nearly done for now’

The Bank of England has been treading a narrow path between bringing inflation back to Earth and tipping the so far surprisingly robust economy into recession. U.K. GDP shrank by 0.5% in July, while a number of British companies issued profit warnings on Tuesday.

“While it may return to raising rates later in the year or into next year, the Bank of England has been bold and is signalling that its job is nearly done for now,” said Marcus Brookes, chief investment officer at Quilter Investors.

“Inflation surprised to the downside yesterday and with economic data rolling over, the BoE clearly feels it now has enough cover to hit the pause button and assess things as we go.”

The U.S. Federal Reserve on Wednesday also held its interest rates steady, but indicated that it still expects one more hike before the end of the year, along with fewer cuts in 2024 than previously anticipated.

Brookes suggested the MPC will have one eye on the U.S., where sentiment remains hawkish, but where the economy is in a stronger position to absorb a further rate rise.

Thomas Verbraken, executive director of risk management research at MSCI, said the burning question is whether the Bank of England’s Thursday decision signals the peak of the interest rate cycle.

“The rationale is that a steady rate can squeeze the economy more gently, averting heightened risks to financial stability and corporate defaults, while more effectively transmitting higher rates into fixed mortgage rates,” he said in an email.

Hussain Mehdi, macro and investment strategist at HSBC Asset Management, said there is now a “good chance” that the Bank of England’s main policy rate has peaked, along with those of the Fed and the European Central Bank.

“Although the latest U.K. pay growth numbers are a cause for concern, labour market data is lagging. Forward looking indicators suggest the U.K. economy is already flirting with recession, a backdrop consistent with cooling wage growth and a policy pivot,” Mehdi said.

“We believe ongoing restrictive policy settings indicate there is a strong likelihood of developed markets entering recession in 2024.”

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