Hawkish tone

Bank holds interest rates but cautions on cuts

Andrew Bailey: cautious

The Bank of England today kept interest rates on hold at 5.25% for the third successive month, though it played down expectations of rapid cuts next year.

Rate-setters on the monetary policy committee voted by a majority of 6–3 to maintain the rate at 5.25%. Three members wanted to increase bank rate by 0.25 percentage points, to 5.5%, and the hawkish tone clouded early market euphoria.

The Bank’s decision follows a similar move last night by the US Federal Reserve whose chairman Jerome Powell hinted at three cuts next year, heralding an end to the months of monetary tightening.

This sparked a surge in equities when the markets opened in London, with talk of up to four cuts by the Bank of England, bringing the rate down to 4.25% by this time next year. A number of banks and building societies have already trimmed their mortgage rates.

But Laith Khalaf, head of investment analysis at AJ Bell said: “The split vote from the Bank’s interest rate committee puts the cat squarely amongst the pigeons.

“The market was happily assuming the interest rate hiking cycle is well and truly done and dusted, but three members of the policy committee think there’s still a case for higher rates.

“It’s a salutary lesson that the Bank’s primary focus is inflation, and that you shouldn’t try and second guess the voting intentions of nine people in a room.

“For now, the mixed outlook from the Bank’s interest rate committee will probably act as a brake on the fall in short term interest rates we’ve seen in the last couple of months, and put upward pressure on mortgage market pricing.”

David Goebel, associate director of investment strategy at wealth manager Evelyn Partners, said: “Today’s decision by the Bank of England will not come as a surprise to markets.

“What is of interest is the tone and rhetoric of the statement: the Bank maintained its hawkish stance, that rates would need to be ‘sufficiently restrictive for sufficiently long’ and leaving the door open for further tightening should inflationary pressures persist, contrasting notably with last night’s FOMC statement which took a more dovish tone.

“We think the UK economy faces more inflationary challenges than some of its global peers, in particular the US, and would suggest the market for UK rates has been swept up recently in a wave of euphoria over interest cuts coming sooner than previously expected.

“Our view is that while the direction of travel is correct, there is risk that markets are disappointed when cuts do not come through as quickly as currently priced in.”

A Treasury Spokesperson said:  “We have turned a corner in our fight against inflation and real wages are rising, but we must keep driving inflation out of the economy to reach our 2% target.  

“By cutting taxes for hard working people and businesses, and helping people into work, we are forecast to deliver the largest boost to potential GDP on record.” 

Bank of England governor Andrew Bailey has adopted a more cautious tone over expectations of early cuts.

The European Central Bank later decided to emulate the Bank of England and left its interest rates unchanged at a record high of 4%.

The news from the US prompted a surge in equity markets, with consumer and property stocks enjoying strong gains. In early trade in London the FTSE 100 was 170 points (2.24%) higher at 7,717.7 with talk gathering of it closing the year back above 8,000.

However, by mid-afternoon it had trimmed its gains and it closed 100.54 points, or 1.3%, higher at 7,648.98. This was its highest for two months and 318 of London’s 350 biggest companies ended the day in positive territory.

Highlands-based Springfield Properties was up 4.5p (6.08%) at 78.5p, Taylor Wimpey rose 4.95p (3.60%) to 142.4p, while B&Q owner Kingfisher leapt 15.70p (6.89%) to 243.7p.

Wall Street reacted positively with the Dow Jones, S&P 500 and Nasdaq all up by 1.4% on Wednesday. All three finished higher for the third successive session, with the Dow hitting a new record. On Thursday the the Dow Jones moved a further 0.4 higher to a record high.

Mr Powell told a press conference that rates were “likely at or near” their peak, but said the bank was still moving cautiously as “no one is declaring victory” yet.

He added: “Inflation is still too high and ongoing progress in bringing it down is not assured.”

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