A citizen walks near the Bank of England in heavy rain in May 2023.
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LONDON – The Bank of England left interest rates unchanged on Thursday but said monetary policy was likely to need to remain tight for a “prolonged period.”
The Monetary Policy Committee voted 6-3 to keep the key interest rate at 5.25%, with three members favoring a further 25 basis point increase to 5.5%.
According to LSEG data, markets this morning were pricing in about an 89% chance of a second straight hold after the bank ended a streak of 14 consecutive rate hikes in September.
“The MPC’s latest forecasts suggest that monetary policy is likely to need to be restrictive for an extended period. Further tightening of monetary policy would be required if there were signs of more persistent inflationary pressures,” the MPC said in its statement on Thursday.
Since the MPC’s last forecasts in October, inflation has fallen to 6.7%, but is still well above the central bank’s 2% target. Economic activity has now weakened significantly and there are signs of easing in the labor market.
In its accompanying monetary policy report, the committee noted on Thursday that inflation has fallen below expectations set out in its August findings. The bank now expects the consumer price index to average around 4.75% in the fourth quarter of 2023, before falling to around 4.5% in the first quarter of next year and 3.75% in the second quarter of 2024.
UK GDP is expected to remain flat in the third quarter of 2023, a weaker performance than the MPC forecast in August. GDP is expected to grow by just 0.1% in the fourth quarter, also weaker than expected in August.
“Since the MPC’s last decision, there has been little news on the key indicators of the persistence of UK inflation. “There continued to be signs of some impact of tighter monetary policy on the labor market and on the dynamics of the real economy in general,” the MPC said in its statement.
It added that monetary policy would need to be “sufficiently restrictive for a sufficiently long period” to sustainably bring inflation back to the 2 percent target.
Britain’s Chancellor of the Exchequer Jeremy Hunt said separately that the UK has been “far more resilient” than many expected, but the best way to create wealth is through sustainable growth.
“The Autumn Statement sets out how we will boost economic growth by unlocking private investment, getting more Britons back to work and creating a more productive British state,” he added.
The US Federal Reserve also left interest rates unchanged on Wednesday and improved its assessment of economic growth. Chairman Jerome Powell emphasized that the Federal Open Market Committee is not discussing rate cuts at this time.
However, markets interpreted his comments at the subsequent press conference as dovish, leading to a significant decline in short-term US Treasury yields that impacted Europe and the UK
Two-year British government bond yields fell to their lowest level since June ahead of the Bank of England’s decision on Thursday. Yields move in the opposite direction to prices.