United Kingdom: Bank of England keeps rates unchanged in December
On 14 December, the Bank of England (BOE) left the bank rate at 5.25%, following 515 basis points of hikes since late 2021 through to August 2023. Market analysts were expecting a hold.
The decision not to hike further was driven by sustained falls in headline and core inflation in recent months, a loss of steam in the labor market and muted economic activity. On the flipside, with headline and core inflation still over double the Bank’s 2.0% target and headline inflation the highest in the G7 in October, it was premature to begin cutting rates.
In its communiqué, the Bank reiterated its willingness to hike further if required, and stated that in any case monetary policy would “need to be restrictive for an extended period of time.” This contrasts the more dovish tone of the Fed, which at its December meeting suggested it would cut rates next year. The Consensus among our panelists is for the bank rate to decline from its current level by end-2024, but to remain elevated compared to pre-pandemic levels. There is a 200 basis-point spread among panelists over the end-2024 rate outlook.
On the outlook, Berenberg’s Kallum Pickering said:
“We still think the eventual path for rates in 2024 and 2025 will be lower than markets currently expect. While the end-2024 bank rate expectation of 4.3% is close to our own call of 4.0%, we think the 3.6% end-2025 call is 60bp too high. Once the BoE starts to cut in Q2, we look for end-2025 rate expectations to fall a little further.”
UniCredit’s Daniel Vernazza expects monetary easing to begin later:
“We continue to expect rate cuts to start in 3Q24, one-quarter later than cuts by the Fed and the ECB, reflecting the higher stickiness of wage growth and services inflation in the UK. But with the economy likely to enter a recession in the coming quarters, and inflation clearly moving down towards 2% next year, the risks are skewed towards an earlier start to cuts.”