Bank of England leaves rates on hold
Newsflash: The Bank of England has left UK interest rates ON HOLD at 5.25%.
This means borrowing cost are still at a 15-year high, as policymakers try to squeeze inflation out of the economy.
Details to follow….
Key events
Bank: Decision was ‘again finely balanced’
The Bank says the decision whether to increase or to maintain Bank Rate at this meeting was “again finely balanced”.
On the one hand, there was a risk of not tightening policy enough when “underlying inflationary pressures could prove more persistent”.
But, there’s also a risk of tightening policy too much given the impact of policy that was still to come through, the Bank adds.
The Bank of Engand’s staff expect GDP growth to be broadly flat in the final quarter of this year, and also over the coming quarters.
The minutes of this month’s MPC meeting say:
The Committee continues to consider a wide range of data on developments in labour market activity. Employment growth is likely to have softened, and there has been further evidence of some loosening in the labour market.
BoE: Further tightening in monetary policy may be required
The Bank of England has also warned that it could raise interest rates higher, if needed, to fight inflation.
The minutes of this month’s meeting of the MPC state that the Bank’s policymakers would tighten policy further if they saw signs of “more persistent inflationary pressures.”
The minutes say:
The MPC will continue to monitor closely indications of persistent inflationary pressures and resilience in the economy as a whole, including a range of measures of the underlying tightness of labour market conditions, wage growth and services price inflation.
Monetary policy will need to be sufficiently restrictive for sufficiently long to return inflation to the 2% target sustainably in the medium term, in line with the Committee’s remit.
As illustrated by the November Monetary Policy Report projections, the Committee continues to judge that monetary policy is likely to need to be restrictive for an extended period of time. Further tightening in monetary policy would be required if there were evidence of more persistent inflationary pressures.
Bank of England split 6-3 again on interest rates
The Bank of England’s policymakers were split on today’s interest rate decision, again, with a trio of hawks pushing, in vain, to raise borrowing costs.
Six members of the monetary policy committee voted to leave rates at 5.25%. They were Andrew Bailey, Sarah Breeden, Ben Broadbent, Swati Dhingra, Huw Pill and Dave Ramsden.
But Megan Greene, Jonathan Haskel and Catherine Mann voted against the proposition, preferring to increase Bank rate by 0.25 percentage points, to 5.5%.
That’s the same split as last month.
Bank of England leaves rates on hold
Newsflash: The Bank of England has left UK interest rates ON HOLD at 5.25%.
This means borrowing cost are still at a 15-year high, as policymakers try to squeeze inflation out of the economy.
Details to follow….
Stock markets are still rallying ahead of the Bank of England decision in 12 minutes’ time.
In London, the FTSE 100 share index is up 2.1% at 7705 points, up 157 points, on track for its highest close since late September.
Yesterday’s surprisingly dovish Federal Reserve meeting continues to lift spirits, as Susannah Streeter, head of money and markets at Hargreaves Lansdown, explains:
There is enthusiasm in the air that the punishing rate hikes of the last two years will start being reversed, sooner rather than later.
The Fed’s acknowledgement that cuts will come in 2024 has fuelled positivity. The FTSE 100 has surged on the open, with housebuilders making strong gains amid hopes that relief is on the way for the housing market. Energy giants are also making strides as oil prices recover.
As the 24 hours of crucial central bank decisions ticks down, policymakers are expected to keep showing more dovish tendencies but are still set to stay behind the market curve when it comes to expectations of looser monetary policy.
Clocks across the City of London are ticking towards noon, when the Bank of England will announce its final interest rate decision of the year.
Investors are still widely expecting the BoE to leave interest rates on hold, at 5.25%, as it tries to bring inflation down.
One former policymaker, Michael Saunders has predicted that the BoE will “want to talk tough” about the near-term outlook for tactical reasons, to “put a lid on pay deals”.
Saunders told Bloomberg TV this morning:
Many pay deals are set in the first few months of the year.
The Bank of England will want to talk tough, in order to try to ensure that firms set pay deals for the coming year at a significantly lower pace than what we’ve seen in the last year.
Government bond prices are rallying today, on expectations of interest rate cuts next year.
This is pushing down the interest rate, or yield, on both UK and US government debt. If borrowing costs are coming down next year, investors are prepared to accept a lower rate of return for holding these bonds.
So, the yield on two-year UK bonds has dropped to 4.24%, down from 4.37% on Thursday evening.
Ten-year UK gilts are strenthening too, with the yield dropping to 3.72% from 3.83% yesterday.
US Treasuries are also rallying, on forecasts that the Fed could cut US interest rates by 1.5 percentage points in 2024.
Today’s Bank of England interest rate decision is unlikely to be unanimous, City economists predict.
Last month, the Monetary Policy Committee voted by a majority of 6–3 to maintain Bank Rate at 5.25%.
Three MPC members, Megan Greene, Jonathan Haskel and Catherine Mann, voted to raise to 5.5%, but were outvoted by the other six who favoured no change.
Julien Lafargue, chief market strategist at Barclays Private Bank, predicts another split at noon today:
“Although the vote will likely still be split, we expect the Bank of England to maintain the Bank Rate at 5.25%.
In our view, the MPC will also likely reinforce its message that the current monetary policy stance is restrictive but that, with risks to inflationary pressures being tilted to the upside, it’s too early to think about interest rate cuts.”
World stock markets have hit their highest level in over 18 months this morning, as optimism over 2024 rate cuts spur shares higher.
Data provider MSCI’s 47-country world stocks index has hit its highest level since April 2022.
It jumped yesterday as the surprisingly dovish Federal Reserve fuelled a rally on Wall Street.
There could be volatility in the financial markets in two hours time, when the Bank of England announces its decision on UK interest rates and publishes the minutes of this week’s meeting.
Kallum Pickering, senior economist at Berenberg, predicts the BoE might challenge market expectations for interest rate cuts next year:
In response to a strongly gas-related surge in inflation, the Bank of England (BoE) lifted its bank rate by 515bp to 5.25% between December 2021 and August 2023.
Short of a major and unlikely spike in inflation in the coming months, UK interest rates have likely peaked for this cycle. But the BoE’s policy intervention is not yet over. After raising the bank rate using open market operations, policymakers are now trying to prevent financial conditions from becoming too easy by influencing market expectations using open mouth operations.
When the BoE publishes the minutes of its December monetary policy meeting at 12:00 GMT today, expect policymakers to push back against rising expectations for rate cuts in 2024. If markets listen, it may prompt some temporary market volatility.
The weakness of the US dollar has pushed the pound up to its highest level in almost two weeks, at $1.266.
US dollar hits four-month low
The US dollar has dropped to a four-month low this morning, after the Federal Reserve signalled that US interest rates have peaked, and will fall in 2024.
The selloff has pushed the US dollar index (which tracks the $ against a basket of currrencies) to its lowest since mid-August, at 102.42 points.
Ricardo Evangelista, senior analyst at ActivTrades, says:
While there had been some persistent doubts about the Fed’s interest rate hikes, it has now become clear that the current cycle is over. Investors now want to know when the central bank will start cutting rates and how fast they will come down.
Speaking at the end of the two-day meeting, Jerome Powell began to lift the veil over the likely path for rates in 2024. This development was welcomed by the financial markets, dissipating some of the doubts that had been capping risk appetite.
Treasury yields fell, as did the US dollar, as investors priced in expectations of a rate cut as early as March, in a dynamic that may lead to further losses for the greenback.
Goldman Sachs are predicting the Bank of England will cut interest rates sharply in 2024, down to 3.75% by the end of the year.
That would imply six quarter-point rate cuts, or a smaller number of larger cuts (or a mix of the two).
Gurpreet Gill, macro strategist global fixed income at Goldman Sachs Asset Management, predicts the first cut will come next May, saying:
“Momentum in UK economic activity has stalled, with weakness across most sectors including consumer-oriented services—a pivotal driver of growth.
“We have also seen a noteworthy deceleration in wage pressures.
“The confluence of sluggish growth momentum and abating underlying inflation pressures mean we expect the Bank of England to initiate rate cuts from May 2024.
“We expect further easing throughout the year, culminating in a Bank Rate of 3.75% by the end of 2024.”
Surprise interest rate rise in Norway
Newsflash: Norway’s central bank has raised its benchmark interest rate by 25 basis points to 4.50%, surprising many investors.
Norges Bank lifted borrowing costs as it battled inflation, and says the policy rate will likely be kept at that level for some time ahead.
This rather bucks the wider mood in the markets towards rate cuts.
Governor Ida Wolden Bache explains:
“We see that the economy is cooling down, but inflation is still too high. An increase in the policy rate now reduces the risk of inflation remaining high for a long period of time. The policy rate will likely be kept at 4.5 percent for some time ahead.”
Of the 27 economists polled in advance by Reuters, 15 had expected rates to stay on hold on Thursday while a minority of 12 had forecast a hike to 4.50%.
This weekend will mark the second anniversary of the Bank of England’s first interest rate hike since the pandemic.
On 16 December 2021, the BoE nudged up base rate to 0.25%, from the record low of 0.1%.
That proved to be the first of 14 rate hikes, which brought rates to their current 15-year high of 5.25% in August.
New data from Moneyfacts shows how this has driven up mortgage rates:
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Since the start of December 2021, the average two-year fixed rate has risen from 2.34% to 6.04% and the average five-year fixed rate has risen from 2.64% to 5.65%.
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On a 10-year fixed rate mortgage, the average rate has risen from 2.97% to 5.96% since December 2021.
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The average standard variable rate (SVR) stands at 8.19%, up from 4.40% in December 2021.
Rachel Springall, Finance Expert at Moneyfactscompare.co.uk, says:
“The past two years have proven to be an unprecedented period of interest rate volatility for mortgages.
Those coming off a fixed rate deal and wishing to fix once more will likely have to cover a much higher mortgage repayment, with the average two-year fixed rate more than double what it was in December 2021.
The lingering cost of living crisis could also be playing havoc with first-time buyers’ ability to get a foot on the property ladder, and affordable housing remains in short supply. Borrowers feeling the squeeze would be wise to seek help before they fall behind on their repayments and lenders will need to work closely with customers to support them moving into 2024.
Almost every member of the FTSE 100 index is up this morning, showing the breadth of the rally.
A rare faller is weapons maker BAE Systems (-2.2%), while Primark owner AB Foods are down 0.6% and energy producer/supplier Centrica are down 0.1%.
2024 will be a year of interest rate cuts by major central banks, says Investec economist Ellie Henderson.
Henderson says that Fed chair Jerome Powell had a change of heart last night, “akin to Scrooge eventually embracing Christmas”, when he revealed that rate cuts were being debated.
This “brought joy of equity and bond markets alike”, with both shares and bonds rallying on Wall Street last night, and in Europe this morning.
Henderson adds:
Focus now turns to the Fed’s peers, with the BoE and the ECB also deciding policy today.
The question is whether they take Fed Chair Powell’s dovish lead or tread more carefully. Interestingly the Swiss National Bank removed a reference to the possibility of higher rates in its statement this morning, having maintained its policy rate at 1.75%. Either way, in the absence of an unexpected shock, last night all but confirmed expectations that 2024 will be the year of the cuts.