United Kingdom: Bank of England keeps rates unchanged in February
On 1 February, 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, and by headline inflation coming in below the Bank’s expectations in December. Moreover, the Bank highlighted easing wage growth recently and expectations of a rise in unemployment going forward. On the flipside, with headline and core inflation still double the Bank’s 2.0% target, it was premature to begin cutting rates.
In its communiqué, the Bank reiterated that monetary policy would “need to be restrictive for an extended period of time”, but dropped any mention of further rate increases. This is aligned with our panelists, none of whom see more monetary tightening. Our Consensus is for the bank rate to decline by close to 90 basis points from its current level by end-2024, thus remaining elevated compared to pre-pandemic levels. There is a 225 basis-point spread among panelists over the end-2024 rate outlook.
On the outlook, Berenberg’s Kallum Pickering said:
“At the next meeting in March, further disinflation should persuade the remaining hawks to drop their preference for further hikes. At the May meeting, which will include a fresh set of forecasts, the BoE should be able to send a clearer signal for the timing of the first cut. While we continue to expect that to happen in June, if a larger minority of policymakers decide that cuts are need by March already, the risks would skew to a first cut in May. We continue to look for 125bp of cuts in 2024.”
In contrast, UniCredit’s Daniel Vernazza expects monetary easing to begin later:
“Rate cuts are coming, but probably not quite so soon or as fast as financial markets had expected. We continue to expect the first rate cut in September, three months later than our forecast for cuts by the Fed and the ECB, reflecting stickier wage growth and services inflation in the UK.”