Shweta Singh, Chief Economist at Cardano, comments:

“Today, the Monetary Policy Committee (MPC) again voted to maintain Bank Rate at 5.25%. This was in line with the expectations of the vast majority of market participants. Notably, there was a 3-way split amongst members with 2 dissenting voices still voting for a Bank Rate increase, and 1 member voting for a cut now. Whilst there is no change in monetary policy settings today, the suggestion is now firmly that peak rates for this cycle have likely been reached and that the next move will be a Bank Rate cut.

However, MPC members are wise to retain some caution as they plan their next policy move. Inflation is not yet fully tamed. The unexpected rise in headline inflation in the year to December was a timely reminder that there is still work to be done. We think that the helpful trend in goods prices, seen during 2023, will not be enough on its own to return the headline inflation rate to the Bank’s policy target of 2%. For example, annual service price inflation still exceeds 6% and has seen only a very modest improvement since it peaked in the Summer of last year.

Updated economic forecasts

The MPC also released updated economic forecasts. These start to reflect a slightly more optimistic growth view. Growth forecasts have been revised higher for 2024-26 on the back of easier financing conditions, lower energy prices, and more supportive fiscal policy. The outlook for inflation is more muddied: headline CPI inflation forecast is revised lower for this year, partly due to lower energy prices, but higher for 2025-26 on the back of a better growth outlook and easier financing conditions. Inflation remains above the BOE target through 2026.

Timing will be everything. The overall tone of February’s monetary policy statement is consistent with a central bank that wants to cut rates but also wants to be sure that they don’t move too fast.

The risk of a policy mistake that could cause a resurgence in inflation is clear. State pension payments, benefits and minimum wage are all set to increase at a pace much higher than the present rate of inflation in April. And, there is the potential to see even more stimulative fiscal measures in the Spring Budget. We believe that the market pricing for UK rate cuts this year is too aggressive and today’s announcement does not change that view.

A look to the US

Similarly, yesterday, the Federal Reserve Open Market Committee validated the market’s expectations of rate cuts to come with Chair Powell reaffirming confidence in the improving path of inflation in the US. Nevertheless an early first move in March is looking very unlikely and, indeed, the market is explicitly being guided away from expecting this.

During Q4 2023, the yield-to-maturity on the 30 year gilt fell by approximately 1.00%, as the UK joined in with a global bond market rally. So far, during January, about half of that move has been retraced; UK pension schemes will have seen their liability values start to fall once again.

MPC members are aware that not all the effects of previous interest rate increases have been seen yet. The current high interest rate environment remains a challenge to UK growth in the near term. We think that the UK is presently in the middle of a mild recession and our expectation is for only a shallow recovery through this year and into 2025.”

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