LONDON (Reuters) – The Bank of England stuck to its guns on Thursday and said British interest rates needed to stay high for “an extended period”, a day after the U.S. Federal Reserve signalled it would cut U.S. interest rates in 2024.
The Monetary Policy Committee voted 6-3 to keep rates at a 15-year high of 5.25% and Governor Andrew Bailey said there was “still some way to go” in the fight against inflation, challenging investors who have bet increasingly on rate cuts.
The three dissenting votes were in favour of raising borrowing costs and there was no talk of cutting them as the BoE remained concerned that inflation in Britain will prove stickier than in the United States and the euro zone.
The central bank also largely shrugged off data showing a slowdown in wage growth and a 0.3% fall in gross domestic product in October – which raises the prospect of a recession in the run-up to a national election expected for 2024.
Sterling jumped by more than half a cent against the U.S. dollar and British government bond prices pared some of the gains they had made in the wake of Wednesday’s Fed statement.
“Successive rate rises have helped bring inflation down from over 10% in January to 4.6% in October. But there is still some way to go. We’ll … take the decisions necessary to get inflation all the way back to 2%,” Bailey said in a statement.
Bailey later told broadcasters it was too early to speculate about cutting rates.
The three policymakers who dissented wanted a further hike to 5.5%, and for most of the others the hold decision had been “finely balanced”, minutes of their policy discussion showed.
Athanasios Vamvakidis, global head of G10 FX strategy at Bank of America, said the BoE’s main message about rates staying high “effectively is a push-back to market pricing early cuts”.
The statement “looks hawkish compared with the very dovish Fed yesterday”, he added.
The BoE’s policy stance assumes a gradual fall in interest rates to 4.25% in three years’ time. An hour after its announcement, investors still saw rates dropping to that level before the end of next year.
STANCE UNCHANGED
The BoE’s main message is unchanged from November, when it forecast it would take two years to return inflation to target.
Although inflation was likely to be slightly lower in the near term than the BoE expected last month, policymakers’ longer-term concerns remained.
“Relative to developments in the United States and the euro area, measures of wage inflation were considerably higher in the United Kingdom and services price inflation had fallen back by less so far,” the BoE said.
The BoE noted that bond yields had fallen “materially” and said it would take this into account in its next quarterly forecasts in February, raising the prospect that it could raise its forecasts for economic growth in 2024 which currently sit at zero.
Furthermore, the announcement of tax cuts last month by finance minister Jeremy Hunt was likely to boost gross domestic product by a quarter of a percent over coming years, but have more limited inflation implications, the BoE added.
The only BoE policymaker to have discussed the timing of a rate cut recently is Chief Economist Huw Pill who shortly after November’s decision said the market expectations then for a first rate cut next August “doesn’t seem totally unreasonable”.
Two days later, Bailey said it was “really too early” to discuss when rates might be cut.
Source: Economy - investing.com
