The Bank of England has opted to maintain its benchmark interest rate at 5.25%, holding steady as inflation levels continue to recede from their previous record highs. This decision, widely anticipated by economists, means that UK interest rates remain at their highest point in 15 years. It marks the second instance since September that Threadneedle Street has chosen not to implement a rate hike.
Inflation, which had surged into double digits, recorded at 6.7% for the year ending in September. This figure, while unchanged from the preceding month, remains notably elevated compared to inflation rates in other G7 economies.
Market analysts are increasingly of the opinion that the era of rate hikes has concluded, even as inflation persists at more than three times the Bank of England’s targeted 2%. George Buckley, Chief UK and Euro Area Economist at Nomura, cited escalating international bond yields and geopolitical uncertainties as factors discouraging further rate increases. He noted, “Rising international bond yields and geopolitical concerns (notwithstanding the potential impact on energy prices of the latter) also suggest against higher rates.” Buckley added, “We think we’ve seen the last of the hiking cycle and expect the next move in rates to be down in Q3 next year.”
A segment of economists contends that the Bank should promptly commence lowering borrowing costs to bolster the UK economy, particularly in light of the looming threat of stagflation. Trevor Williams, representing the Institute of Economic Affairs think tank, emphasized mounting evidence suggesting that the UK’s monetary policy is overly restrictive, potentially resulting in price deflation in the coming years and the prospect of an interim recession. Williams asserted, “The Bank of England should act now by lowering interest rates.”
Despite calls for immediate action, the prevailing consensus is that UK interest rates will not see a reduction until 2024. This announcement has ignited a modest rally in bond prices within the markets.
British two-year government bond yields experienced a drop of over 10 basis points, reaching their lowest levels since June. Shorter-term bond market yields tend to be more responsive to shifts in interest rates.
In parallel decisions, other major central banks, including the Federal Reserve and the European Central Bank, have also chosen to maintain their current interest rate levels. This coordinated approach underscores the cautious approach being taken by global monetary authorities amidst ongoing economic uncertainties.
Source: AP News
