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United Kingdom Monetary Policy September 2023

United Kingdom: BoE keeps rates unchanged in September

On 21 September, the Bank of England (BoE) left the bank rate at 5.25%, following 515 basis points of hikes since late 2021. Most market analysts were expecting a hike.

The decision was driven partly by inflation in August which undershot the expectations of both the Bank and markets more broadly. In addition, the BoE highlighted “signs of a loosening in the labour market”, and said it expected the economy to perform worse in H2 2023 than it previously anticipated.

In its communiqué, the Bank reiterated its willingness to hike further if required. Given that four out of nine members of the Bank’s voting committee preferred to hike rates in September, some extra monetary tightening is certainly on the cards ahead, though if headline inflation continues to moderate more hikes would likely not be needed. Much will depend on the evolution of inflation and wages in the coming months.

On the outlook, Berenberg’s Kallum Pickering said:

“Although we had expected one last hike from the BoE, pausing now decreases the risk that the bank overtightens and tips the UK into a needless recession over winter. It is the correct policy decision, in our view. […] We expect the BoE to keep bank rate unchanged at 5.25% through Q4 2023 and Q1 2024 before the first cut comes in Q2 2024. For end-2024 we project a 4.0% bank rate – implying 125bp of total cuts next year.”

United Overseas Bank’s Lee Sue Ann took a similar view:

“The BOE will keep all options on the table […] Barring any huge upside surprise to services inflation or wage data, we think that given the scale of [the] surprise by the BOE, there is a high chance it will choose to pause again in Nov. As such our base case remains for the Bank Rate to remain at 5.25% for the rest of this year.”

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