- Policy rate maintained at 5.25 per cent
- Decision hung in the balance after inflation ‘stuck’ at 6.7 per cent in September
The Bank of England’s Monetary Policy Committee (MPC) voted to maintain interest rates at 5.25 per cent, the second time in a row that rate-setters have elected to keep rates constant.
The decision has strengthened the conviction of commentators that UK interest rates have reached their peak.
The decision was finely balanced with three members of the MPC voting for a 0.25 percentage point hike, while six members voted to leave interest rates unchanged. Despite disappointing inflation data last month, forecasters expect inflation to fall below 5 per cent in the next release. As such, financial markets saw little chance of another hike this month.
The case for further interest rate hikes was weakened by rising bond yields. Since the BoE’s September meeting, the 10-year gilt yield surged by half a percentage point, tightening financial conditions. Investec economist Sandra Horsfield said that rising long-dated yields “adds to what the MPC has been trying to do with 5.15 percentage points of rate rises”, and reduces the need for further rate hikes.
In a statement released after the decision, rate-setters said that there has been little to work on to justify any other decision. The committee added: "There have continued to be signs of some impact of tighter monetary policy on the labour market. Given the significant increase in Bank Rate since the start of this tightening cycle, the current monetary policy stance is restrictive."
Since the BoE’s independence in 1997, interest rate cuts have typically followed 10 months after the final interest rate hike. This time, there might be longer to wait: policymakers have alluded to a ‘Table Mountain’ profile for interest rates, implying an extended period of high rates.
Investec’s Horsfield thinks that the MPC will need to see inflation return to below 3 per cent before it can ‘credibly’ cut interest rates, which would be the middle of next year based on current forecasts.
Economists at Dutch bank ING expect gradual rate cuts starting in the summer of next year. Market pricing suggests a slower descent, implying that rates will only fall to 4.5 per cent by the end of 2025.
Some economists believe economic stagnation will strengthen the case for far steeper rate cuts. Data shows that the UK economy stalled over the summer, with GDP growing by just 0.3 per cent between June and August. Though the Composite PMI inched up in October, it remains at a level historically consistent with a contraction in GDP.
Analysts at Capital Economics believe higher interest rates will ultimately trigger a mild recession and see interest rates falling to 3 per cent by the end of 2025.
