The Bank of England’s Monetary Policy Committee leaves interest rates unchanged in a narrow vote at 5.25%

The Bank of England has maintained its interest rates at 5.25% following a closely divided vote, likely signalling the peak of this MPC cycle’s borrowing costs. In light of surprisingly positive inflation data in August at 6.7%, the Monetary Policy Committee was narrowly split with a five-to-four majority in leaving the rates unchanged. Critically, the pivotal vote was cast by BoE governor Andrew Bailey. This decision marks a pause after a string of 14 rate hikes since the commencement of the QT cycle in December 2021.

The FED also opted to keep its benchmark rate stable. While the MPC didn’t provide extensive insight into its future actions, it implied that rates had reached a level sufficient to restore price stability, stating, To achieve sustainable medium-term inflation at the 2% target, monetary policy must remain appropriately restrictive for an extended period.

Subsequent to the decision, the value of the British pound declined by 0.66% against the US dollar. Two-year gilt yields, which indicate expectations for interest rates, fell to 4.878%, down from 4.893% before the vote. In August, inflation stood at 6.7%, and there were no indications of an imminent interest rate cut.

Governor Bailey remarked in a statement that Inflation has experienced notable decreases in the past few months, and expect this downward trend to persist. Although we appreciate this positive development, we must not become complacent. Our top priority is to ensure that inflation returns to a stable level, and we are committed to taking the required actions to accomplish this objective. Chancellor Jeremy Hunt expressed his full support for the Bank of England’s actions to combat inflation in a letter to the governor.

While officials did not foresee a resurgence of inflationary pressures, they recognized that keeping the current interest rates in place did not eliminate the potential for additional rate increases in the near future. The MPC affirmed that further tightening of monetary policy would be required if there were indications of sustained inflationary pressures.

Which way did the members of the MPC vote?

The five members who voted to keep rates steady included Bailey, deputy governor Ben Broadbent, chief economist Huw Pill, deputy governor Sir Dave Ramsden, and external member Swati Dhingra. They emphasized the significance of Wednesday’s inflation figures, coupled with weaker labor market data, as signs that previous rate hikes had been effective in cooling the economy. They argued that maintaining a restrictive policy stance would be warranted until substantial progress was made in returning inflation to the 2% target.

On the other hand, the four MPC members advocating for a 0.25% rate increase to 5.5%, disagreed. They asserted that there was still evidence of enduring inflationary pressures and that higher borrowing costs would help address the risk of inflation persistence. This hawkish group included three of the four external MPC members—Megan Greene, Jonathan Haskel, and Catherine Mann—along with the departing deputy governor, Sir Jon Cunliffe, participating in his final MPC meeting.

How will the MPC calibrate their asset purchasing and QT program for the year ahead?

The MPC collectively decided to accelerate its quantitative tightening process for the upcoming year, raising it from £80Bln in 2022-23 to £100Bln in 2023-24. This move reverses a portion of the monetary stimulus measures implemented by the BoE since 2009, although the central bank’s holdings of government bonds are still expected to reach £658Bln by September 2024. The MPC emphasized that it views interest rates as the primary tool of monetary policy, and the impact of its asset sales on borrowing costs was considered to be “modest.”

General Market Reaction

Families preparing to transition from fixed-rate mortgages may still experience financial strain in the upcoming months due to the Bank of England’s decision to maintain interest rates. As a result, these households can expect to pay an average of £220 more per month, particularly in light of ongoing high inflation.

Property developers’ stocks experienced a surge in value in response to the Bank of England’s decision to leave interest rates untouched. However, despite the initial positive momentum, the UK stock markets remained in negative territory during the early afternoon on Thursday.

Before the Bank of England’s announcement, London’s FTSE 100 and FTSE 250 indices had been trending downward. Nevertheless, shortly after the policy decision to maintain rates at 5.25 percent, these indices rebounded, rising by 0.5 percent and 0.8 percent, respectively.

Subsequently, the market rally lost steam, resulting in the benchmark FTSE 100 closing the day down by 0.2 percent, while the mid-cap FTSE 250 ended 0.1 percent lower.

Among the sectors benefiting the most from this development were real estate stocks, with companies like Barratt Developments, Berkeley Group, and Taylor Wimpey all witnessing gains of over 2 percent.

FTSE retreats after initial gains this lunchtime, after the announcement.

Interest Rates will be high for some time

Economists have issued a cautionary note, suggesting that the Bank of England is likely to maintain elevated interest rates for an extended period due to persistently high inflation, which remains well above the bank’s 2 percent target.

Reflecting on the Bank’s decision to keep interest rates steady at 5.25 percent, Yael Selfin, the chief economist at KPMG UK, commented:

“Now that interest rates have conceivably reached their peak in this economic cycle, central bank officials will closely monitor economic data to ensure that the current monetary policy stance remains sufficiently restrictive to effectively curb inflation in the medium term.”

She further noted that the Monetary Policy Committee (MPC) would need to carefully assess the risk of inflation being fueled by increasing energy and global food costs, particularly in light of a weakening labor market.

The prevailing consensus among experts is that interest rates are poised to stay elevated for an extended duration.

Quantitative Tightening

The Bank of England’s Monetary Policy Committee has unanimously endorsed a “modest” acceleration in the quantitative tightening process. This involves raising the planned pace of reducing bond holdings from £80 billion to £100 billion over the upcoming year.

According to the MPC’s minutes released on Thursday, an analysis of market conditions indicated that this accelerated pace was unlikely to disrupt the normal functioning of financial markets. Furthermore, it was noted that this increase would result in the rate of active sales of government bonds remaining “broadly unchanged compared to the previous year.”

In total, the combination of sales and the passive disposal of maturing bonds is expected to reduce the size of the Bank of England’s asset purchase facility to £658 billion over the next 12 months.

Mortgage Rate Cuts

The Bank of England’s decision to maintain the bank rate at 5.25% is expected to lead to further reductions in mortgage rates, according to experts. Yesterday’s favorable inflation figures and the Bank of England’s choice to keep the base rate at 5.25% are seen as paving the way for lenders to reduce mortgage rates in the coming weeks.

Knight Frank noted, “The rate at which borrowers are opting for tracker mortgages over fixed-rate products is expected to increase now. If the base rate has indeed reached its peak and rate cuts begin in mid-2024, borrowers could potentially save money by choosing a tracker mortgage.”

Investors are now contemplating whether the Bank of England has completed its rate hikes entirely, given the pause in its latest decision. Before Thursday’s announcement, there was already a fully anticipated additional rate hike, whether it occurred this week or later in the year.

Now swaps markets are implying a roughly 70 per cent chance of a final quarter-point rise to 5.5 per cent.

The Bank of England will have little in the way of fresh economic indicators before rate-setters meet again in early November.

There would only be one more set of inflation and wage related data before the next MPC meeting, so there’s not substantial amount new data points for the bank to go on, volatility in consumer price inflation is still likely to continue.

The August inflation print on Wednesday, caught analysts off-guard, coming in below expectations at 6.7% versus the 7% consensus.

Markets are currently pricing in a 35% chance of a 25Bps rate rise in November.

Today’s news will be particularly welcomed by those on tracker mortgages, according to Rightmove.

Rightmove said in a statement – “The surprising decision to hold rates rather than raise them as expected is another indication that we may now be at the peak of Base Rate rises”. Furthermore “Today’s decision to pause rates is positive news for prospective home movers, and it is likely that lenders will continue to reduce rates, as we’ve seen over the last eight weeks, and we may see the pace of reductions increase in the coming weeks“.

Tracker mortgages may now become more appealing to borrowers according to Rightmove. Whilst five-year fixed rate products to continue to be cheaper than shorter-term deals for the foreseeable future, borrowers may be more willing to pay a premium to get a tracker or two-year fixed rate mortgage now, anticipating that rates will fall in the medium term, rather than locking themselves into a five-year deal at a potentially higher rate.

Those on tracker rates won’t see a rise in their monthly payments for the first time since December 2021.

Martin Lewis has urged people to act fast to secure top savings rates from banks.

He says that high street banks set their fixed-rate savings rates based on longer term predictions.

And he says the Bank of England’s decision to maintain the interest rate could result in banks “shaving down their savings rates at speed”.

“If so, and you were looking to lock-in a fix, you’ll want to open a top fix this minute as the rates could drop even by later today, certainly if it does happen by later this week,” – Martin Lewis