Bank of England’s Monetary Policy Holds Steady Amid Economic Uncertainty
In a recent Reuters poll of economists, the Bank of England’s (BoE) monetary policy has shown signs of stability as it aims to navigate through economic uncertainties. The BoE’s decision to maintain the Bank Rate at 5.25% until at least July marks the end of its tightening cycle, surprising the markets last week. However, the committee’s split vote and the unexpected drop in inflation have raised questions about the central bank’s future moves.
Economic indicators reveal a mixed picture. Inflation, which had been surging, unexpectedly dropped to an 18-month low of 6.7%, with core and services inflation showing significant declines. This development, combined with a slowing economy, prompted the Monetary Policy Committee’s (MPC) decision to hold rates steady. The BoE had previously raised interest rates by 515 basis points in 14 consecutive moves since December 2021 to combat soaring inflation, which had reached 11.1% in October 2022, significantly exceeding the BoE’s 2% target.
The decision to halt rate hikes will likely bring relief to homeowners and small businesses, who have been grappling with rising borrowing costs. Just a few months ago, markets anticipated BoE rates reaching 6% or higher due to persistently high inflation.
The recent Reuters poll indicates that rates will remain unchanged at the November 2 announcement, with over 75% of economists predicting no move. However, some experts believe that a rate hike in November could still be possible, contingent on substantial positive surprises in services inflation or wage data.
The BoE’s shift in focus from the height of interest rates to the length of time they remain high reflects a broader strategy to ensure economic stability. While nearly a quarter of respondents predicted a final 25-basis-point hike to 5.50% in November, it represents a turnaround from earlier expectations, when almost half of economists foresaw rates reaching 5.75% or higher.
Despite this, over 40% of economists still advocate for further rate hikes this year, emphasizing the importance of monitoring core inflation and wage growth. The median forecasts suggest that rates will stay at 5.25% until at least July, aligning with market expectations. Subsequently, rates are predicted to decrease to 5.00% and 4.75% in the third and fourth quarters, respectively.
Looking ahead, around one-third of economists anticipate the first rate cut in the second quarter of next year. However, it is only in the third quarter that the majority predict rates to drop to 5.00% or lower.
The central banks’ decisions in Europe and the United States are also under scrutiny. While the European Central Bank is expected to cut rates in the third quarter of next year, the Federal Reserve might initiate rate adjustments as early as the second quarter.
Amid these economic dynamics, British inflation is projected to average 6.8% and 4.7% this quarter and the next, staying above the BoE’s 2% target until at least 2025. Simultaneously, the UK’s economic growth is forecasted at 0.4% and 0.5% for this year and the next.
The BoE’s strategic decisions in the coming months will play a pivotal role in shaping the UK’s economic trajectory, while experts and market participants closely monitor inflation and growth indicators for insights into the central bank’s future actions.