Why has the Bank of England kept its rates on hold and when could they fall?


The Bank of England kept its key interest rate at 5.25 percent on Thursday. as hawkish sentiment derailed hopes of a reduction in March.

Its Monetary Policy Committee voted to maintain the key rate by a majority of six to three, with two of its members voting for a further 25 basis point hike to 5.5 percent, as recent data did not failed to allay concerns about wage growth and services inflation.

The BoE still believes consumer price inflation will “temporarily” fall to 2 percent by April, as the impact of previous increases is felt.

But the CPI, which fell to 4 percent in December, is expected to rise to 2.75 percent by the end of the year and remain above the bank’s 2 percent target until in 2027.

The MPC votes 6 to 3 for another pause and two members vote for a 25 basis point increase

The MPC votes 6 to 3 for another pause and two members vote for a 25 basis point increase

“This reflects the persistence of domestic inflationary pressures, despite an increasing degree of slack in the economy,” the bank said.

Governor Andrew Bailey added that the BoE needed “more evidence that inflation will fall further and remain low” before it could “declare victory” and start cutting rates.

The bank has repeatedly warned that investors expecting an imminent policy rate cut were being overambitious.and the hawkish tone of the MPC forced a rethink of market prices.

The BoE maintains its key rate at 5.25%

The BoE maintains its key rate at 5.25%

Markets were expecting cuts of up to 125 basis points by the end of the year, which would have brought the base rate to 4 percent.

However, after the MPC meeting, pricing suggested cuts closer to 100 basis points, leaving the base rate at 4.25% by the end of 2024.

However, Bailey left room for optimism, telling reporters that the MPC was now actively considering when rate cuts should take place.

He said: “For me the key question has moved from ‘how restrictive should we be?’ to “how long should we maintain this position?” “.

Inflation returns to the banks' target of 2% before rising again.

Inflation returns to the banks’ target of 2% before rising again.

Inflation forecasts

The BoE estimates that CPI will rise from 2 percent in April to 3.6 percent in the first quarter of next year.

He doesn’t expect the figure to start the year below target until at least 2027, when he expects a CPI of 1.9 percent.

Although both wage and services inflation have fallen significantly from their peaks, the BoE is concerned that each measure remains “significantly elevated”.

Annual wage growth excluding bonuses reached 7.3 percent in the third quarter of 2023, compared to a record 7.8 percent in the previous three months.

Services inflation was also particularly strong, with prices up 6 percent year-on-year in December, unchanged from the previous month.

The BoE will monitor these figures closely when new data from the Office for National Statistics is released this month.

GDP growth expected to increase gradually over the next three years

GDP growth expected to increase gradually over the next three years

He pointed to a business survey suggesting the increase in average wages in 2024 would be just slightly lower than in 2023, at 5.4 per cent.

According to the minutes of the last MPC meeting: “Although service price inflation and wage growth declined somewhat more than expected, key indicators of inflation persistence remained high.

“Questions arose, for which further evidence would be needed, about how entrenched this persistence was and, therefore, how long the current level of the discount rate should be maintained.”

The unemployment rate is also expected to increase

The unemployment rate is also expected to increase

Economic growth prospects

Although the BoE’s main priority is to bring the CPI rate under control, the bank will keep a close eye on the weakness of the UK economy while assessing the timing of its first rate cut.

The UK’s gross domestic product is estimated to have contracted by 0.1 per cent between July and September, according to the most recent available data from the ONS, revised down from previous estimates of a stable growth.

The UK is not alone in suffering from sluggish growth, with the US economy a rare exception among comparable markets as the Eurozone continues to tread water.

But the BoE said: “Following recent weakness, GDP growth is expected to gradually accelerate over the forecast period, largely reflecting a slowdown in the growth rate due to past Bank Rate increases.

“Business surveys are consistent with an improvement in the short-term business outlook.”

However, GDP is expected to grow by only 0.2 percent in 2024, 0.75 percent in 2025 and 1 percent in 2026, with lackluster growth lagging behind its global counterparts.

The unemployment rate is also expected to increase “gradually”, from its current level of 4.2 percent to 4.4 percent in 2024, then to 4.7 and 4.9 percent over the following two years.

Full forecast

Full forecast

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