- Bank of England committee votes to maintain rates at 5.25 per cent
- Federal Reserve pushes back on spring rate cut bets
The Bank of England's Monetary Policy Committee voted today to maintain the base rate at 5.25 per cent. The first meeting of 2024 saw 6 members of the Monetary Policy Committee vote to hold rates at 5.25 per cent while 2 favoured an additional increase, and one a cut.
In December’s meeting, rate-setters were careful to avoid any messaging that could be seen to endorse the market's expectation of an interest rate cut. Today, the Committee continued to tread cautiously and stressed that rate cuts would not be imminent.
US policymakers also pushed back against market expectations of interest rate cuts when they met on Wednesday. Fed rate-setters dropped references to the possibility of further rate hikes being necessary but stressed that they would need “greater confidence” on inflation before they changed course
How higher rates are hitting the UK economy
The Bank of England’s last forecasts, published in November, showed a pessimistic path for inflation, suggesting that it would take until the end of 2025 to return to the 2 per cent target. Since then, the outlook for energy prices looks far brighter, and some economists now expect the inflation rate to fall below 2 per cent this spring.
Today’s updated forecasts took a more optimistic tone, suggesting that inflation would fall to target in a matter of months before increasing again later in the year. Rate-setters see a subdued outlook for growth, but expect GDP to pick up gradually over the years ahead. Yet policymakers remain sensitive to the risk of ‘overtightening’, and have stressed that thanks to long time lags, the impact of last year’s rate hikes is yet to feed through. Swati Dhingra, who voted alone for a 0.25 percentage point rate cut in this meeting, argued that transmission lags “meant that the Bank Rate needed to become less restrictive now”.
The Budget complicates the BoE’s decisions
According to Mitul Patel, senior LDI portfolio manager at State Street Global Advisors, the Bank of England may have “one eye on March’s Budget”, where the Chancellor is expected to cut taxes ahead of an election later in the year.
Lower bond yields should unlock some additional ‘headroom’ for the Chancellor, and we could see more than £20bn worth of tax cuts announced. Depending on where this falls (speculation about fuel duty, inheritance tax and income tax is mounting), it could increase growth by between 0.2 and 0.4 percentage points.
State Street’s Patel thinks that the economic boost “could lessen the need for rate cuts”, and added that the BoE may want to wait to see the details of the Budget before signalling a shift in monetary policy stance.
When the UK and US will cut rates
Rate-setters remain in ‘data dependent’ mode – but the UK economic data is very mixed. Inflation is falling materially faster than the Bank expected last year, but wage inflation remains a concern. Pay growth is still running at an annual rate of 6.6 per cent, and economists think that it will need to cool to around 4.5 per cent before the BoE feels it can cut rates.
But if the headline rate of inflation retreats as quickly as expected, the BoE will find it very hard to justify keeping rates on hold. According to analysts at Capital Economics, inflation could fall below 2 per cent this spring – lower than the inflation target, and lower than inflation rates in the US and euro area, too. They think that if inflation dips below 2 per cent in April, UK rate-setters may “change their tune” by May.
In the US, Fed chair Jerome Powell dashed hopes of a rate cut at the next meeting, stressing that March rate cuts were not the “base case”. According to the CME FedWatch tool, traders reduced their bets on a March rate cut from 60 per cent before the meeting to under 40 per cent afterwards.
Following the meeting, Paul Ashworth, an economist at Capital Economics, said cuts in the early May meeting now looked more likey. Anna Stupnytska, global economist at Fidelity International, said the Fed won't be in a rush to cut rates until June because of "sticky inflation".
What today's decision means for markets
Economists at NatWest think that a more hawkish BoE combined with an increased supply of debt, could see gilts underperform in the months ahead. Later cuts from the BoE could also strengthen the pound: good news for UK importers and manufacturers, but worse news for FTSE 100 companies with a high proportion of overseas earnings.
But a muted market reaction may be just what the BoE wants to see. State Street’s Patel said premature talk of rate cuts had buoyed markets, and “potentially impede the transmission mechanism” of today’s higher rates. As a result, rate-setters are likely to remain tight-lipped about the timing of cuts until later in the year.
