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UK enters 'new phase of suspended animation' after Bank of England holds rates


While three members of the central bank’s Monetary Policy Committee voted to raise interest rates by 25bps to 5.5%, a six member majority successfully maintained rates 5.25%.

The Bank also revised its macroeconomics forecasts upwards, expecting inflation to decline to 4.75% in the current quarter, before dropping to 4.25% in the first quarter of 2024 and 3.75% in the second quarter.

Inflation is now projected to return to 2% at the end of 2025, compared to the second quarter of 2025, as expected at the MPC’s previous September meeting.

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Fredrik Repton, senior portfolio manager at Neuberger Berman, said that the upwards revision for the Bank’s inflation forecast likely “had some influence” on the three members of the MPC choosing to vote for another hike.

“However, the growth forecast profile was adjusted lower for the second half of 2023 and 2024, in line with the weaker data that we have been seeing since the end of the summer,” he noted.

Laith Khalaf, head of investment analysis at AJ Bell, said the decision indicated the entrance of a “new phase of suspended animation in the monetary cycle”.

“The first phase was denial, as the Bank steadfastly maintained that inflation was transitory. This gave way to a sustained period of flurried action, as the Bank raised interest rates by 5% in less than two years. We are now entering the third, agonising phase of the interest rate cycle: wait and see,” he said. 

“Tighter monetary policy takes time to bed in, and the Bank does not yet know if they have made the porridge too hot or undercooked it,” he added, noting that there may be a fourth phase of correction, as the BoE seeks to “fine tune” its monetary position depending on data.

Khalaf also noted that the replacement of Jon Cunliffe with Sarah Breeden on the interest rate committee “has shifted the balance in a dovish direction”, with six members now voting to keep rates on hold, up from five in September. This was Breeden’s second day in her new role, making this her first MPC vote.

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Hussain Mehdi, macro and investment strategist at HSBC Asset Management, said that like the Federal Reserve and European Central Bank, the Bank of England was likely done in its hiking cycle, given UK economic momentum is “flagging” and labour market conditions are “cooling”.

As “very restrictive policy” continues to moderate demand, and forward-looking indicators point to further economic slowdown and disinflation, he argued that the “doves may start gaining the upper hand as we head into 2024”.

Gurpreet Gill, macro strategist, global fixed income at Goldman Sachs Asset Management, agreed, stating the move reflected “emergent progress on disinflation and a slowing economy”.

“Bank of England officials have started to acknowledge that tight policy is impacting the economy, which we believe implies limited desire to move further into restrictive policy territory,” said Gill.

“We continue to think rates will stay at the current cycle high into 2024, a trajectory that the Bank’s chief economist, Huw Pill, has likened to Table Mountain.”

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Repton also noted that the MPC statement had echoed remarks from Fed chair Jay Powell that the central bank “was waiting to see if more hikes are needed to ease inflationary pressures and that it is premature to be thinking about rate cuts”.

In a press conference following the MPC decision, BoE governor Andrew Bailey said it was “much too early to be thinking about rate cuts” as inflation remained “too high”.

The decision was the last before the Autumn Statement, with Khalaf noting that when the Budget was delivered in March, forecasts predicted a peak in rates of 4.25%.

“That flush is well and truly busted, and the Autumn Statement will doubtless see some pennies lost to higher borrowing costs,” he said.



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