Bank Of England Meets Expectations By Holding Rates At 5.25%

The central bank's Monetary Policy Committee voted six to three to hold interest rates, with the minority voting to hike rates by 25bps.

Last month, the MPC voted five to four to hold interest rates, in a surprise to analysts. Investors had widely predicted the 15th rise in a row to 5.5% from 5.25%, but a sharp decline in inflation in August pushed the committee to hold rates.

The shift in voting patterns resulted from the replacement of Jon Cunliffe on the MPC by Sarah Breeden, following his retirement.

All eyes on the BoE as Federal Reserve holds rates at 22-year high

Despite market expectations for a hold, inflation still remains well above the central bank's 2% target, currently sitting at 6.7%, while core inflation fell slightly to 6.1% back in September.

In the MPC's report published today (2 November), the committee said inflation is expected to continue to "fall sharply", and decline to 4.75% in the current quarter, before dropping to 4.25% in Q1 2024 and 3.75% in Q2. It expects inflation will then return to the 2% target in two years, falling to 1.6% in three years.

"Against a backdrop of subdued economic activity, employment growth is likely to have softened over the second half of 2023, and to a greater extent than projected in the August report," the MPC report said.

"Falling vacancies and surveys indicating an easing of recruitment difficulties also point to a loosening in the labour market."

Euro area inflation falls to lowest level in two years as GDP shrinks

The report also noted that UK GDP was expected to have been flat in the third quarter of this year and grow by only 0.1% in Q4, weaker than projected in its August forecasts

The MPC added that its current forecasts are conditioned on interest rates remaining at around 5.25% until the third quarter of next year, before declining to 4.25% by the end of 2026, a lower profile than was used in its August projections.

"Monetary policy will need to be sufficiently restrictive for sufficiently long to return inflation to the 2% target sustainably in the medium term," it said.

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