Industry News

The Bank of England and the Table Mountain

KLOFinancial |

After 14 consecutive rises in Interest Rates, the Bank of England Monetary Policy Committee (MPC) at its last meeting held on the 20th of September, reached the decision to finally pause the rate hiking cycle.

The decision taken by the MPC to keep Interest Rates on hold at 5.25% was a very finely balanced one, reached only by the narrow majority vote of 5-4. Incidentally, the Governor of the Bank of England, Andrew Bailey, voted in favour of pausing.

Many households in the process of remortgaging, and businesses planning to take on debt for investment, will surely have breathed a sigh of relief on hearing the news. This should also be positive news for current and prospective holders of fixed interest assets, particularly Gilts, given the inverse relationship between yields and the price of Gilts. Savers and prospective buyers of annuities might be less happy.

Why Pause Interest Rates Now?

The rationale for keeping interest rates on hold is probably due to two factors; signs the economy is rapidly slowing and inflation numbers having been lower than expected in August. UK Gross Domestic Product (GDP) shrunk by 0.5% in July, more than forecast, and the Bank of England expects the economy to remain weak for the rest of 2023.

At the same time, inflation, as measured by the headline Consumer Price Index (CPI), had fallen considerably from 7.9% in June to 6.7% in August; more than expected. Inflation falling more than forecast, coupled with stuttering economic growth, probably provided the basis for the Bank of England’s decision to keep interest rates on hold.

Was this the Final Interest Rate Rise?

Despite recent good news about inflation, the Bank of England does not expect CPI inflation to get back to the 2% mandatory target any time before the second half of 2025. There is still quite a way to go in the battle against the cost of living, it seems.

Rising oil prices (caused in the main by production cuts on the part of Saudi Arabia and Russia), a tight labour market sustaining wage growth pressures, and the “stickiness” of domestic prices in the services sector, are among the factors that might slow down the process of returning UK inflation to target.

If economic growth, domestically and internationally, unexpectedly picks up speed, it is likely inflationary pressure might reappear via more expensive commodities, whose import cost would be exacerbated by the recent weakness of the pound, particularly versus the US dollar.

Has the Interest Rates Hiking Cycle Reached the Peak?

We have probably reached the peak of the interest rates hiking cycle. However, the top is not a sharp one, from which descending quickly. More like the flat top of the Table Mountain in Cape Town, South Africa, where the Chief Economist of the Bank of England, Huw Pill, recently delivered a presentation at the South African Reserve Bank Biennial Conference.

Similarly, the Bank of England is likely in a “wait and see” mode now, ready to act at the first sign of inflation flaring up again but with no immediate expectation of cutting interest rates. A “higher for longer” approach to interest rates is the more likely outcome for the foreseeable future.   

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