The Bank of England holds Interest rates at 5.25% today

2nd November 2023

The Bank of England holds interest rates at 5.25% today, Shweta Singh, Chief Economist, Cardano, said:

Key points:

  • Four strong reasons why the Bank of England can afford to wait and watch
  • A host of indicators suggest the labour market is starting to loosen
  • No policy rate cuts anticipated until Q3 2024

“As expected the Bank of England (BOE) kept the policy rate on hold today (2nd November) and joined the Fed and the ECB in signaling that its rate hike cycle has ended.

“While our base case a month ago was for another rate hike, economic and price data since then has served up a surprise on the downside. There are four strong reasons why the BOE can afford to wait and watch the lagged effect of its tightening cycle: monetary policy is in restrictive territory, economic momentum is deteriorating rapidly, the labour market is weakening and disinflationary pressures are kicking in.

“A host of indicators show that the labour market is starting to loosen, including vacancies, pay-rolled employment, and wage growth. This is despite data on labour market tightness having been patchy last month, due to the low response rate to the Labour Force Survey, while annual wage growth remains above the BOE’s forecast.

“Last month’s REC Survey recovered slightly but overall remains depressed, which suggests more weakness ahead in the labour market. Wages in the private and services sectors are a better cyclical indicator of labour market conditions than overall wages, and both have slowed meaningfully on a three-month sequential basis.

“Inflationary pressures are now past their peak, and we expect headline inflation to drop sharply in October on the back of energy-related base effects. Nonetheless, the BOE retained its hawkish forward guidance. Despite progress on disinflation and rebalancing the labour market, there is still a long way to go before inflationary pressures are firmly back to the BOE’s target.

“While we expect a recession in the UK early next year, we do not expect policy rate cuts until Q3 2024.”