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The Bank of England joins the Federal Reserve in pausing rate hikes

21 September 2023

The two central banks both chose not to extend their interest rate hiking cycles this week.

By Jonathan Jones,

Editor, Trustnet

The Bank of England (BofE) has paused interest rates at 5.25% - the first time in almost two years that the UK central bank has elected against an increase.

It was a tight call however, with members of the monetary policy committee (MPC) voting five to four in favour of pausing rates. Had they gone ahead, it would have been the 15th consecutive hike in this cycle.

The decision follows inflation figures out yesterday, which showed the consumer prices index (CPI) rose by 6.7% in August, a slower pace than the 6.8% in July, while core CPI was down to 6.2% from 6.9%.

Some pondered whether the BofE would pause its rate hiking cycle as a result, although most predicted another 25 basis point increase.

Rob Morgan, chief investment analyst at Charles Stanley, said: "Yesterday’s lower-than-expected inflation reading was a fillip for the Bank of England. Alongside the cracks starting to show in the economy and weakness starting to creep into the jobs market it provided evidence price rises are starting to return to the trajectory the BofE is happy with."

Despite the pause, he warned that “the cycle of raising rates may not be quite at an end”. While the BofE is conscious not to inflict more pain than necessary on the economy, its primary job is to bring inflation back down, “which means one more rate rise is possible before they plateau into next year to ensure rising prices are kept in check,” he noted.

Hugh Gimber, global market strategist at J.P. Morgan Asset Management, agreed, highlighting two key risks to the idea that we have reached the end of the hiking cycle.

The first is the recent easing in services inflation has been driven by seasonal factors such as airfares and hotel prices, while strong wage pressures caused by a tight labour markets make this far from a sure bet.

Another is the 25% rally in oil prices since the middle of the year, which could offset lower domestic energy prices in the winter months.

“With every step higher in interest rates, recent communication has highlighted that the risk of overtightening has become a greater factor in the Bank’s decision making process. Unfortunately, some weakening in activity is unavoidable to put the inflation genie back in the bottle,” he said.

Going against the consensus view that it would raise rates, Marcus Brookes, chief investment officer at Quilter Investors, said the decision to keep rates on hold was “bold” and that the Bank of England was “signalling that its job is nearly done for now”.

However, he warned that while this could be the end of the interest rate hiking cycle, this doesn’t mean the pain will simply go away for businesses and consumers.

“The Bank of England has made it clear that rates will be higher for longer, so investors need to prepare accordingly,” he said.

Yesterday Orbis’ Alec Cutler told Trustnet 4% long-run price increases are more likely than the BofE achieving its 2% target.

“It just blows me away because people want to believe it so badly,” he said. “That’s the biggest asset that central banks have – people's willingness to believe in 2%.”

It follows the US Federal Reserve’s decision last night to leave interest rates on pause, keeping them in a range of 5.25%-5.5%, a 22-year high, after core inflation figures last week showed price increase growth slowed to 4.2%, tracking down to the Fed’s 2% target.

Brookes noted governor Andrew Bailey and the rest of the monetary policy committee will be “looking closely at the US”, but noted that the US economy is in a much stronger position.

Charles Hepworth, investment director at GAM Investments, said the accompanying policy statement alongside the Fed’s decision showed “a majority of members” think another hike this year is still warranted

“The amount of easing that the market expects for next year was hampered with the Fed’s “dot-plot” forecasts indicating just 0.5% of cuts projected in 2024,” he said.

Alexandra Wilson-Elizondo , deputy chief investment officer of multi-asset strategies at Goldman Sachs Asset Management said the “hawkish hold” was expected, but that the tone was more assertive than expected.

“While a share of past policy tightening is still in the pipeline the Fed can go into wait and see mode, hence the pause. However, the main risk remains tarnishing their largest asset, anti-inflation credibility, which warrants favouring a hawkishness reaction function,” she said.

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