BOE pause a relief for consumers, but rates to remain high for some time

THE Bank of England’s (BOE) latest decision to keep its benchmark interest rate unchanged will come as a relief to Britain’s consumers, many of whom have been struggling with mortgage payments.

Nevertheless, experts warned that interest rates are expected to remain high during the coming 12 months.

After 14 hikes from a low of 0.1 per cent in 2021, the central bank surprised rate hawks by keeping its interest rate at 5.25 per cent.

A steady decline in inflation to 6.7 per cent in August, from a peak of 11.1 per cent in October 2022, encouraged five of the nine members of the Monetary Policy Committee (MPC) to vote in favour of an unchanged rate.

The remaining four wanted a 0.25 per cent rise to 5.5 per cent, because they are worried inflation will remain embedded.

The UK’s economy, property market and sterling are on a downward path, however.

Susannah Streeter, head of money and markets at Hargreaves Lansdown, a financial services company, said the central bank’s decision reflects concern that another hike could “tip the economy into recession”.

“It will be a big relief for consumers and companies who have been struggling with higher borrowing costs,” she said.

She does not see rate cuts soon, though, which means the economy, currency and asset prices may face a tough recovery trajectory.

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“We think rates will stay at this peak of 5.25 per cent for longer than (in the US and Europe),” said Paul Dales, chief UK economist at Capital Economics. “When rates are cut in late 2024, they will then be reduced further and faster than widely expected.”

The BOE has made it clear that despite evidence of an economic downturn, its major concern is inflation. It has firmly indicated that interest rates will remain high during the coming 12 months.

“There is absolutely no room for complacency,” said BOE governor Andrew Bailey. “We need to be sure inflation returns to normal, and we will continue to take the decisions necessary to do just that.”

Money will remain tight, and banks are already cautious about lending.

The tighter policy stance is a reversal from a monetary splurge beginning in 2009, soon after the Global Financial Crisis, through to the pandemic-plagued years of 2020 and 2021.

As part of its “quantitative easing” policy, the BOE bought £839 billion (S$1.4 trillion) of gilts from banks and other institutions. BOE money flooded the financial markets and boosted inflation.

In the past 12 months, the BOE has reverted to “quantitative tightening” – selling £80 billion of gilts.

This week, the MPC announced that a further £100 billion of gilts would be sold.

Ibrahim Quadri and his UK economic team at Goldman Sachs regarded the quantitative tightening policy as significant.

They noted the MPC’s hawkish language: monetary policy needs to be “sufficiently restrictive for sufficiently long to return inflation to a sustainable 2 per cent target in the medium term”.

The MPC also warned that “if there were to be evidence of more persistent (inflationary) pressures, further tightening in monetary policy would be required”.

“Just like the (US Federal Reserve), the BOE wants the markets to believe in the high-for-long narrative,” Dales of Capital Economics said. “A rebound in services inflation, another surge in wage growth and a further leap in oil prices could conceivably cause the BOE to raise rates in December.”

Not everyone believes the BOE is making the right calls.

“Having ignored money when inflation was rising, they’re now ignoring money when inflation is actually about to fall,” said Mervyn King, a former BOE governor. “What we could see is a mistake in both directions.”

He has said in interviews that a continuation of monetary policy tightening for the next six months could bring about recession, as well as a sharp fall in inflation.

Jeremy Hunt, UK Chancellor of the Exchequer, is standing firm: “Now is the time to see the job through. We are on track to halve inflation this year, and sticking to our plan is the only way to bring interest and mortgage rates down.”