Bank of England kept interest rate unchanged

Policy rates maintained at 5.25%. It was stated that rates will have to be kept higher for longer to not only bring inflation to the targeted level of 2% but to firmly stay there.  

In this article:

1.       UK economy

2.       What does it mean to consumers?

3.       How is RC navigating this?  

UK economy

BOE are expecting inflation to reach the targeted level but to rise again later on. Given the increased geopolitical tensions, the BOE stated that they cannot rule out another geopolitical event which may lead to higher prices for longer.  

GDP – The British economy expanded 0.3% month-over-month in November 2023, rebounding from a 0.3% fall in October and beating market forecasts of a 0.2% rise. It is the strongest GDP growth in five months. While year-on-year grew 0.2% in November 2023, rebounding from a revised 0.1% fall in October and matching market forecasts.  

It is now expected that the economy continues growing at a very slow pace and narrowly escapes a hard-landing scenario, but this is assuming the BOE loosens monetary policy on time.  

Inflation – December´s annual inflation came out higher than consensus at 4% and it is expected to be within the 3% level by the end of Q1. November´s forecast is currently higher than December´s, this is due to sharp decrease in the price of Oil & Gas.

A risk to higher CPI is BOE cutting rates sooner than required, as this not only will lead to higher spending in the economy and increase the pressure for higher inflationary factor, but it would also increase the outflow in GBP seeking higher yield in G10 denominated assets which would decrease the value of GBP with its trading partners thus, increase the cost of import which in turn would be passed on to consumers. Markets seem to forget this but BOE has to keep long-term inflation expectation anchored 2%, otherwise it runs the risk of creating a second-round inflation effect.

What does it mean to consumers?

By BOE keeping interest rates unchanged, stating that it shall be kept higher for longer even though the economic data is decreasing substantially and forecasting that unemployment is poised to increase, this means that consumers will have to tight their belts further and implement some sort of austerity measures to cope with what´s to come.  

Consumer confidence in the UK rose to (-19%) in December from (-22%) in November. Although cuts in National Insurance, rising wages and expected falling mortgage rates, consumer confidence indicator remains negative, which means that majority of respondent remained pessimistic.

Retail sales for December decreased by 3.2% and is expected to remain in negative levels until the end of Q1 where is forecasted to be at positive 0.20%.  

In December, Joe Staton, client strategy director at GfK, stated that consumer expectations of personal finances for the next 12 months is positive for the first time in two years. He also said that this shows things are heading in the right direction and that people are more likely to spend.

How is RC navigating this?

At RC, we think that:  

• It is premature to expect a cut in rates in the next policy decision as inflationary pressures and risk to higher CPI are still persistent;
  

• CPI to slightly increase due to cyclical factors affecting Oil & Gas starting from Q4;
  

• Short-term geopolitical risk still lingers, thus the carefulness of BOE to ascertain that inflation settles at targeted level is warranted;
  

• And of course, the BOE would not want to cut rates way ahead of other G10 countries as they would run the risk of a currency depreciation seeking high yields and fears of second round inflation.

We can see that BOE MPC´s mood is slightly dovish now as 1/9 voted for a rate cut (previously was 0/9) and 2/9 voted to hike (previously was 3/9) and 6/9 voted to hold (previously at 6/9). RC expects the first rate cut from BOE in the Q3.  

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