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Bank of England maintains interest rates at 5.25%

21st September

Today, the Monetary Policy Committee (MPC) maintained Bank Rate at 5.25% – a pause in the rate hiking cycle that commenced in December 2021 and has continued through 14 consecutive MPC meetings. This was a very close call for MPC members which is reflected in the 5-4 vote outcome.

Shweta Singh, Senior Economist, shared our thoughts:

Recent labour market and inflation data, which show labour market rebalancing and inflationary pressures easing have just proven sufficient for the Bank of England to ‘wait and see’ how inflation trends continue to develop through the Autumn.

Even if inflation is now tamed for this cycle (we don’t think that it is) wages continue to grow at a brisk rate and well above the level consistent with the Bank’s 2% inflation target.  Underlying inflation pressures remain sticky and are likely to stay elevated over the next twelve months. We think that today’s MPC decision represents a pause within, rather than an end of, the tightening cycle.

Governor Bailey is going to want to talk about today’s decision in terms of the optionality that it provides to the MPC. He will be acutely aware that the lagged effects of prior policy actions are still to be fully seen, yet also mindful that key elements of the disinflation seen over the Summer were largely baked in due to year-on-year comparisons in energy prices.

Looking ahead, we still expect one more interest rate hike and further expect that UK monetary policy will have to remain in restrictive territory for some time before cuts could be considered. This is unlikely to be feasible until well into the second half of 2024, if not later.

And, perhaps more importantly for the economy as a whole, the heightened interest rate environment challenges the market’s UK growth forecasts for 2024. Expectations which are still too optimistic in our view. In the weaker growth environment that we expect, both in the UK and abroad, government bond allocations will prove to be a valuable diversifying offset to equity market investments for defined benefit pension scheme investors’ growth portfolios.