At their third consecutive meeting, the Monetary Policy Committee voted 6-3 in favor of maintaining rates at their current level. Though three members wished to increase rates by 25 basis points to 5.5%, the rest of the Committee signaled that further tightening of monetary policy is likely to be necessary for an extended period of time. In their report, the MPC pointed out that although inflation persistently remains high, looser monetary policy has triggered a weakening of economic activity.
The Bank of England maintained the main interest rate at 5.25% on Thursday and affirmed that monetary policy would be 'restrictive for an extended period.' The Monetary Policy Committee voted 6-3 to hold the rate steady for the third successive meeting, although the three dissenting members favored a 25 basis point rise to 5.5%. Despite UK headline inflation dropping to 4.6% in October (the lowest in two years), wage growth of more than 7% remains a cause of discomfort for the central bank in its aim to bring inflation back to the 2% target.
The MPC noted that 'key indicators of UK inflation persistence remain elevated,' while tighter monetary policy is having a negative effect on the real economy. The economy saw a zero growth in Q3, as predicted by the Monetary Policy Committee, and shrunk unexpectedly by 0.3% in month-on-month terms in October. The central bank had raised the benchmark rate from 0.1% to 5.25% over a span of 14 hikes from December 2021 to August 2023, but had then halted the rise in September.
Although the US Federal Reserve announced three rate cuts for 2024 on Wednesday, stimulating global stock markets, the MPC reaffirmed its stance that rates will remain in restrictive mode for a prolonged period, in order to bring inflation back to the target over the medium term.
The MPC stated that based on the November Monetary Policy Report's projections, it continues to believe that an extended period of restrictive monetary policy will be required. In the event of any further inflationary pressures, additional tightening would be essential. It was projected that the consumer price index will be around 4.75% in Q4 2023, before declining to 4.5% and then 3.75% in the following quarters. Additionally, GDP is predicted to only rise 0.1% in Q4 after remaining unchanged in the previous one. Though profitability of households is better than anticipated, higher borrowing costs have yet to generate an effect on the economy.
Suren Thiru, economics director at ICAEW, commented that the MPC's decision made it clear that rate peaks have already been hit. However, he suggested that the Bank may be risking keeping monetary policy too rigid for too long in such a fragile economic environment. He warned that the Bank's rhetoric on rates may be overly pessimistic considering weakening wage growth and further economic deterioration. In light of this, the case for rate cuts is likely to get stronger in the coming months and the MPC might start loosening policy by next summer.
Hetal Mehta, head of economic research at St James's Place, observed that the bank's stance was markedly dissimilar to that of the Federal Reserve. "The attributed underlying inflation is still excessively high and the latest pricing of multiple rate cuts beginning early next year was clearly a relaxation of financial conditions that the Bank of England felt the need to repel," she said. "The drop in wages inflation to date is not enough to be consistent with the 2% inflation aim."
In spite of concerns that a maintaining of tight monetary policy may lead to an economic downturn, a Treasury spokesperson stated by email that the U.K. had "made progress" in the battle against inflation. The spokesperson remarked that real wages are on the rise but that the country has to "keep driving inflation out of the economy to reach our 2% target."
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