The BoE’s “Table Mountain” Approach Sees Rates Highest for Longest

The Bank of England kept its Bank Rate on hold at 5.25% on September 21, 2023. The UK’s economic backdrop is weak, so we believe that the BoE will keep interest rates at this level for the near future.

Our Take on the Meeting

Given the elevated inflation backdrop, we’re somewhat surprised that the BoE kept interest rates on hold. This is the BoE’s second dovish signal, after it stepped back from 0.50 percentage point (pp) hikes to a 0.25 pp hike at its previous meeting.

Granted, recent data points to a weakening economy and a softening nominal environment. That said, today seemed to us like the most dovish statement and decision that has recently come out of a major central bank. The BoE gave little, if any, forward guidance, nor the conviction that rates might go higher if inflation remains high. Instead, it emphasized the following factors behind its decision:

  • Inflation is falling faster than expected, but services inflation can be volatile.
  • The BoE recalled that its latest projections, conditioned on a market-implied path for Bank Rate to 5.5%, showed inflation in the medium term falling below  its target of 2%.
  • Pass-through from previous rate hikes is yet to be fully felt in the real economy, which is visibly weakening – and fast.
  • Wage growth was “stabilising” on alternative measures to average weekly earnings (AWE), which is key data on wage growth.
  • Material weakening in the labor market would likely only happen with a significant delay.

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