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United Kingdom Monetary Policy November 2023

United Kingdom: Bank of England keeps rates unchanged in November

On 2 November, the Bank of England (BOE) left the bank rate at 5.25%, mirroring its decision in September and following 515 basis points of hikes since late 2021. Most market analysts were expecting a hold.

The decision not to hike further was driven by lower-than-anticipated inflation and weaker-than-expected economic activity in Q3, and by the Bank’s downward revision to the economy’s growth prospects for Q4. Moreover, the BOE commented that data on job vacancies indicated that the labor market was slowing. On the flipside, with headline and core inflation still over triple the 2.0% target and the highest in the G7, 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.” The Consensus among our panelists is for rates to decline from their current level by end-2024, but to remain elevated compared to pre-pandemic levels.

On the outlook, ING’s James Smith said:

“We believe markets are right to be thinking about rate cuts from next summer. As the BoE itself acknowledges, much of the impact of past tightening is still to hit the economy. We estimate the average rate on mortgage lending, which so far has gone from 2% to 3.1%, will go to 3.8% by the end of 2024 as more homeowners refinance. [As such,] we think the Bank will be in a position to take its foot off the brake. We’re forecasting a gradual easing cycle that takes Bank Rate back to just above 3% by the middle of 2025.”

In a similar vein, UniCredit’s Daniel Vernazza said:

“We expect rate cuts to start in 3Q24, later than the Fed and 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, we expect 75bp of rate cuts in total for 2H24, a faster pace of rate cuts than the market is expecting.”

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