2023-09-21 13:52:08
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The Bank of England has held interest rates at 5.25 per cent following a knife-edge vote that is likely to signal the peak of borrowing costs following almost two years of rate rises.
Thursday’s decision sent the pound lower once morest the dollar but boosted the shares of property developers.
Following better than expected inflation data a day before, the bank’s Monetary Policy Committee was split five to four in favour of leaving rates unchanged, with BoE governor Andrew Bailey casting the final and decisive vote.
It was the first pause following 14 consecutive rate rises since the start of the tightening cycle in December 2021. On Wednesday, the US Federal Reserve also voted also voted to keep its benchmark rate steady.
Although the MPC made little comment regarding its future actions, it suggested that rates were now high enough to succeed in restoring price stability.
“Monetary policy will need to be sufficiently restrictive for sufficiently long to return inflation to the 2 per cent target sustainably in the medium term,” it said.
Yael Selfin, chief economist at KPMG UK, said that interest rates had “potentially reached their peak in this cycle”, while noting that BoE officials would be monitoring data for reassurance that policy was restrictive enough to bring inflation down.
But swaps markets still imply roughly a 70 per cent chance of a final quarter point rise before March next year to 5.5 per cent.
Sterling, which had already weakened following Wednesday’s inflation data, extended its losses to trade down 0.8 per cent at a six-month low once morest the dollar following the BoE’s decision.
Real estate stocks gained following the MPC vote, with Barratt Developments and Berkeley Group rising by around 1 per cent. However, a brief broader rally in the market soon faded, with the benchmark FTSE 100 down 0.1 per cent on the day by mid-followingnoon.
The MPC decision was a welcome piece of good economic news for prime minister Rishi Sunak as he seeks to take charge of the political agenda by delaying key net zero targets.
It also followed Wednesday’s data showing a surprise dip in inflation to 6.7 per cent in August.
“We are making progress, including on my five priorities,” Sunak said at a press conference on Wednesday. “Inflation — down once more and on track to be halved.”
Sunak promised at the start of the year that he would “halve inflation”; it would have to fall to regarding 5.3 per cent in December to meet that target.
However both Sunak and chancellor Jeremy Hunt were careful not to suggest that the fight once morest inflation was over. “It’s still three times higher than it should be,” said one ally of Hunt.
In a statement, Bailey said: “Inflation has fallen a lot in recent months, and we think it will continue to do so. That’s welcome news. But there is no room for complacency. We need to be sure inflation returns to normal and we will continue to take the decisions necessary to do just that.”
Officials maintained that the hold in rates did not preclude another rate rise in months to come. “Further tightening in monetary policy would be required if there was evidence of more persistent inflationary pressures,” the MPC said.
The five members who voted to hold rates were Bailey, deputy governor Ben Broadbent, chief economist Huw Pill, deputy governor Sir Dave Ramsden and the external member Swati Dhingra.
They highlighted the importance of Wednesday’s inflation figures alongside weaker data in the labour market suggesting previous rate rises were cooling the economy.
The four MPC members in the minority voting to raise rates by 0.25 percentage points to 5.5 per cent said there was “still evidence of more persistent inflationary pressures”. Higher borrowing costs would “address the risks of more deeply embedded inflation persistence”, they added.
This hawkish group included three of the four external MPC members — Megan Greene, Jonathan Haskel and Catherine Mann — along with the outgoing deputy governor Sir Jon Cunliffe, who was present for his last MPC meeting.
Alongside the interest rate decision, the committee unanimously agreed to raise the pace of its quantitative tightening process for the year ahead from £80bn in 2022-23 to £100bn in 2023-24.
The MPC said it considered interest rates to be the active tool of monetary policy, adding that the effect of its asset sales on borrowing costs was “modest”.
Labour responded to the BoE’s decision by warning that families still faced pain in the months to come.
“Households coming off fixed rate mortgages will be paying an average of £220 more a month and inflation remains high because of the Conservatives’ disastrous ‘mini’ Budget,” said Rachel Reeves, shadow chancellor.
Labour claims that Britain is continuing to suffer from the fallout of the disastrous “mini” Budget presented by the government of Liz Truss, former prime minister, in September 2022.
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