Bank of England Holds Rates, Hints at Coming Cut

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Facts

  • The Bank of England has held interest rates at the current level of 5.25%, the highest since the 2008 financial crisis, for a fourth consecutive time but signaled that a cut is likely in the near future based on its forecast that inflation will temporarily fall below the 2% target within months.1
  • This comes as its Monetary Policy Committee (MPC) voted 6-3 in favor of keeping borrowing costs steady, with two members supporting another quarter-point hike and one voting for a reduction.2
  • The lone vote to lower rates was the first since March 2020, while the three-way split over whether to increase, decrease, or hold rates was the first since March 2008.3
  • Announced on Thursday, this decision follows similar moves by the US Federal Reserve, which hinted on Wednesday at a possible cut in the future, and the European Central Bank, which last week signaled that interest rates could be lowered in the spring.4
  • The British central bank raised interest rates from December 2021 to August 2023 in an effort to slow down the pace of price rises, as the inflation rate reached double digits in 2022. In December, inflation was at 4%, slightly up from 3.9% in November.1
  • The market has taken an overall optimistic outlook for lower borrowing costs in the UK. Goldman Sachs has projected the Bank of England to start cutting the base rate in May, while some economists believe that interest rates could fall as low as 3% by the end of 2024.5

Sources: 1Guardian, 2CNBC, 3Sky News, 4Wall Street Journal and 5Independent.

Narratives

  • Establishment-critical narrative, as provided by Evening Standard. When the Bank of England had to increase rates to keep inflation in line with the 2% target, its MPC made ordinary people pay the price for its delay in increasing interest rates. Now, despite warning signs that this restrictive monetary policy is plunging the economy into a recession, the MPC insists on not lowering the base rate. Once again, the MPC has failed the British people.
  • Pro-establishment narrative, as provided by BBC News. The Bank of England has tightened its monetary policy to ease the pace of price growth, successfully bringing inflation to 4% in December — down from the 40-year high reached in October 2022. As inflation is now expected to temporarily fall back to the 2% target by the summer, cuts in interest rates are already on the horizon. Yet, more evidence is needed to ensure that this is the right move, so rates have rightfully been held.

Predictions