Today, the Monetary Policy Committee (MPC) voted to maintain Bank Rate at 5.25%. As was the case at September’s and November’s meeting, a minority of MPC members voted for a rate increase. The number of dissenting voices stayed the same at 3, suggesting that recent economic news has not been sufficient to move the needle on the balance of opinion amongst members. The Bank does however subtly acknowledge that growth has disappointed recently. More importantly though, the Bank notes that whilst private sector wages and Services inflation – key indicators that the Bank tracks – have weakened more than their expectations, key indicators of UK inflation persistence remain elevated.  While the recent growth disappointment is a notable development. The fiscal measures announced in the Autumn Statement will add to growth and perhaps less to inflation, but we will have to wait until February to see the government’s new fiscal plans fully incorporated into the Bank’s projections.

The overall tone of December’s monetary policy statement is consistent with the relatively more hawkish MPC over the recent few weeks: the Bank remains committed to addressing the UK’s inflation persistence. We have argued that market pricing for BOE rate cuts have been too aggressive and today’s decision gives credence to our view.

In contrast, yesterday, the Federal Reserve Open Market Committee signaled a strong desire to reduce interest rates in the US next year. Markets immediately responded positively to this policy pivot. We do however think that such optimism on US rates is a little premature.

Recent UK employment market data and inflation data has been helpful. That said, MPC members will be mindful of the risks of a renewed impetus behind inflation at the beginning of Q2 2024. State pension payments, benefits and minimum wage are all set to increase at a rate much higher than the present rate of inflation next year. There is an added risk of even more stimulative fiscal measures in the Spring Budget ahead of General Elections next year.

Since mid-October, the yield-to-maturity on the 30 year gilt is lower by approximately 0.75%, led by a rally in global yields and US Treasury in particular and BOE rate cut expectations. During the first three quarters of 2023 UK pension schemes saw their liability values reduce as a result of a near 1.0% rise in long-dated gilt yields, the most recent market trends reverse more than half of this effect.

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 expect the UK to be in recession as we enter the New Year and to experience a shallow recovery thereafter. But, as for as our outlook for UK monetary policy; looking ahead, we believe that market expectations for when interest rates might be lowered are pitched too soon.