On December 14th, the Bank of England (BoE) decided to maintain its benchmark interest rate at 5.25 percent, which is the highest level in 15 years.
The BoE’s Monetary Policy Committee voted 6-3 to hold the rate at its meeting, with three members advocating for a 0.25 percentage point increase to 5.5 percent.
The central bank stated that the UK’s economic growth is projected to be relatively flat in the fourth quarter of the current year and in the upcoming quarters. “Employment growth has likely slowed down, and there is evidence of a loosening in the labor market,” the bank reported.
The UK’s Consumer Price Index (CPI) decreased from 6.7 percent in September to a two-year low of 4.6 percent in October as energy costs eased.
The BoE anticipates that inflation will stay close to its current rate around the turn of the year, with services price inflation projected to temporarily increase in January before gradually decreasing thereafter.
The bank emphasized that its 2 percent inflation target remains applicable, highlighting the importance of price stability in the UK monetary policy. It also noted that monetary policy is expected to continue to be restrictive for an extended period.
Unlike the U.S. Federal Reserve, the BoE did not commit to a change in stance towards rate cuts just yet, according to Lindsay James, an investment strategist at Quilter Investors. The U.S. Federal Reserve indicated an end to its rate hiking cycle on Wednesday.
However, the British pound strengthened on Thursday afternoon, trading at over 1.27 U.S. dollars.
Susannah Streeter, head of money and markets at Hargreaves Lansdown, remarked that the timing of any rate cut will depend on balancing inflation and supporting the economy, given the current stagnation conditions.
The UK economy’s poor performance has created pressure on the central bank. In October, the country’s gross domestic product (GDP) contracted by 0.3 percent, with declines in all three main sectors, based on official figures.
Additionally, the S&P Global / CIPS UK Construction Purchasing Managers’ Index fell to 45.5 in November, indicating prolonged negative conditions in the UK construction sector.
A survey by the British Chambers of Commerce (BCC) in September revealed that nearly half of firms claimed that borrowing costs were negatively affecting their business. Director General Shevaun Haviland stated that firms were struggling to pay off debts and obtain loans.
Susannah Streeter also noted that inflation might not fall as rapidly as expected in 2024 due to domestically-fueled inflation, presenting a challenge for the Bank of England to address.
