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The Bank of England left interest rates unmoved on Thursday, in a divided vote, with policymakers still fretting over rampant services inflation.
The central bank did predict a brief return to its 2% target in the second-quarter of the year. However, it wants a ‘lasting’ return to the target, and sticky services inflation is making life difficult for Threadneedle Street for now.
‘We expect inflation to fall, though with some bumps along the way,’ the BoE said.
At its February meeting, the BoE kept the benchmark bank rate at 5.25%. It is the fourth successive hold, following one in September, which ended a streak of 14 consecutive hikes since December 2021, and two more in November and December. The BoE had rapidly increased bank rate from a Covid-19-induced low of 0.10%.
It was a split outcome, with six Monetary Policy Committee members, Governor Andrew Bailey included, favouring the hold. Two would have preferred rates to have been lifted by 25 basis points, they were Jonathan Haskel and Catherine Mann. One member, Swati Dhingra, preferred to reduce bank rate by 25 basis points, to 5.00%.
According to FXStreet cited consensus, only one policymaker was expected to back a hike. None had been expected to push for a cut.
‘Although services price inflation and wage growth have fallen by somewhat more than expected, key indicators of inflation persistence remain elevated,’ the BoE said.
Services inflation is expected to ease as the year progresses, though at a slower pace than other ‘components of the CPI basket’.
Governor Bailey told reporters that there has been ‘good news over the past few months’. Save for a slight uptick in the UK annual consumer inflation rate, to 4.0% in December from 3.9% in November, readings recently have largely been morale boosting. The rate of inflation has ebbed from a recent peak of 11.1% seen in October 2022.
The BoE expects the consumer inflation rate to ebb ‘temporarily to the 2% target’ in the second-quarter of the year, but Bailey warned of a spike to around 2.8% thereafter.
This is not ‘an acceptable state of affairs as a resting place’, Bailey cautioned.
The BoE said in its latest monetary policy report: ‘In the MPC’s latest most likely, or modal, projection conditioned on the lower market-implied path for bank rate, CPI inflation is around 2.75% by the end of this year. It then remains above target over nearly all of the remainder of the forecast period. This reflects the persistence of domestic inflationary pressures, despite an increasing degree of slack in the economy. CPI inflation is projected to be 2.3% in two years’ time and 1.9% in three years.’
The projections suggest a return to the 2% target early in 2027. Its November projections suggested this could have been achieved in early-2026.
Bailey is after a ‘sufficient level of confidence’ that inflation will return to target before the benchmark bank rate is reduced.
The Bank of England said: ‘CPI inflation is projected to fall in 2024 Q2 before increasing again in Q3 and Q4. This profile of inflation over the second half of the year is accounted for by developments in the direct energy price contribution to 12-month inflation, which becomes less negative.’
Bailey did note that an ‘upside bias’ to the BoE’s language was omitted from the policy decision.
‘The good news on the economy has taken away the need for warning that rates could rise again,’ he added, strengthening the conviction that the next move in bank rate will be a cut.
However, Bailey did not get drawn into speculating when a cut would come. Stressing a data-driven approach, he noted that there are two consumer price index and two unemployment readings before the BoE’s next decision in March.
Bailey also suggested the BoE is happy to keep holding rates if needed, even if the Federal Reserve and European Central Bank cut.
‘We each make decisions based on our economies. We will justify them as we always do in that context,’ Bailey said.
BoE Deputy Governor Dave Ramsden, once again pointing to services inflation, said that in the UK it stands at just over 6%. In the eurozone and US, however, it is ‘more like 4%’.
The BoE’s interest rate decision follows the US Federal Reserve’s on Wednesday.
At the conclusion of its two-day meeting, the Federal Open Market Committee unanimously voted not to raise the fed funds rate, for the fourth meeting in a row. The key rate is targeted at a range between 5.25%-5.50%, the highest in nearly 23 years.
Speaking after the vote, Chair Jerome Powell said a rate cut in March, is not the ‘most likely case.’
The BoE largely increased its growth forecast for the UK. Though it expects gross domestic product to stagnate in the first-quarter of the year, knocked from its previous 0.2% growth outlook, it raised its forecasts for 2025 and 2026.
It expects a GDP rise of 0.5% in the first-quarter of 2025, having expected it to be flat in its November forecast. For the first-quarter of 2026, it nudged up its growth forecast to 0.8% from 0.6%.
‘Following recent weakness, GDP growth is expected to pick up gradually during the forecast period, in large part reflecting a waning drag on the rate of growth from past increases in bank rate,’ the BoE said.
The pound traded at $1.2666 against the dollar at the conclusion of Bailey’s press conference, up from $1.2631 just before the interest rate decision at midday. It had risen as high as $1.2685 during the press conference.
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