The Bank of England (BoE) voted 6-3 in favour of keeping the bank rate unchanged at 5.25%, in line with our expectation, on Thursday—marking the second consecutive pause this hiking cycle. The BoE’s decision and forward guidance echoed similar pauses by the U.S. Federal Reserve and the European Central Bank. A small but significant addition in the Monetary Policy Committee’s (MPC) statement indicated policy rates will be at these levels “for an extended period of time.”
We think this suggests a central bank that wants to push back on current market pricing of interest rates being cut by nearly 25 basis points (bps) by September 2024. BoE Governor Andrew Bailey stated that policymakers cannot become complacent on inflation and if they maintain this policy stance for long enough, they “will squeeze inflation.” While the MPC’s statement leaves a hiking optionality, we think the bar remains high for further hikes and this is likely the peak for interest rates, absent any persistent large surprises in inflation or wage data. Bond markets reacted positively as the 10-year Gilt rallied by around 12 bps to reach 4.37%, while the pound sterling bounced against the US dollar to 1.2225 before falling to 1.2170.
Compared to the estimates found in the central bank’s August Monetary Policy Report (MPR), the November MPR forecasts GDP growth will deteriorate further and be flat in Q3. However, growth is expected to modestly recover to 0.1% in Q4. The MPR forecasts inflation to fall significantly in October when the effect of the energy regulator’s (Ofgem) price cap is reflected in the data. The BoE projects inflation to average around 4.6% in Q3 2023, slightly below the August forecast, before falling to 2% by the end of 2025.
Euro area GDP contracted by 0.1% in Q3, in line with the recent decline seen in economic activity data. However, euro area inflation is heading in the right direction—both preliminary headline and core inflation fell in October to 2.9% and 4.2%, respectively. The drop was driven by a combination of lower energy prices and base effects on the year-over-year calculation from October last year.
Rufaro Chiriseri is the head of fixed income for the British Isles at RBC Wealth Management.
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