by William Schomberg and Andy Bruce
LONDON (Reuters) – The Bank of England (BoE) on Thursday kept interest rates at their highest level in 15 years as it fights inflation in the United Kingdom, one of the highest in the world among developed economies, and warned that it does not plan to lower the cost of credit for the moment.
Despite the publication of indicators showing that the British economy is now at risk of recession and could at best stagnate in the coming years, the BoE has kept the bank rate at 5.25% for the second time in a row, after the September meeting, which then marked the first pause after 14 straight rate increases.
She also reinforced her message that borrowing costs were set to remain high, even though only half the impact of her long string of rate hikes has been felt in the economy so far.
The MPC, the central bank’s monetary policy committee, voted 6-3 in favor of keeping the discount rate at the current level, in line with the expectations of economists polled by Reuters.
“The latest projections from the Monetary Policy Committee indicate that monetary policy will likely have to be restrictive for a prolonged period,” the BoE wrote in its press release.
“Further tightening of monetary policy would be necessary if there was evidence of more persistent inflationary pressure,” the statement added.
BoE Governor Andrew Bailey also tried to convey the message that falling inflation over the past year, from its highest level since the 1980s, and weakening The economic outlook should not be taken as a sign that rate cuts may soon be considered.
“We need to see inflation continue to fall towards our target of 2%,” he said, quoted in the press release.
“We have kept rates unchanged this month, but we will monitor developments closely to determine whether further rate hikes are necessary. It is far too early to consider rate cuts.”
THE POUND INCREASES ITS GAINS
On the financial markets, the pound sterling increased its gains against the dollar and the euro after the BoE announcements, while the yield on ten-year British bonds reduced its decline somewhat but still lost more than eleven points of base, at 4.396%, in a context of general easing on sovereign rates.
Bank of England Deputy Governor Ben Broadbent said on Thursday that the release of the bank’s forecasts was not intended to send a message to financial markets.
“I don’t think we’re trying to send a specific message to the financial markets,” he told a news conference.
“Prices in financial markets have not changed much since we published these forecasts. The main message (…) is broader: we believe that policy must remain restrictive for some time,” he said. -he adds.
The BoE’s decision to keep rates unchanged follows similar measures taken by the European Central Bank (ECB) last week and the US Federal Reserve (Fed) on Wednesday.
BoE officials are also on the lookout for clues as to whether the ongoing conflict between Israel and Palestinian Hamas is likely to cause a re-acceleration of inflation, notably by pushing up oil and gas prices. .
Among the members of the BoE’s monetary policy committee, Megan Greene, Jonathan Haskel and Catherine Mann voted in favor of increasing rates to 5.5%.
Sarah Breeden, who replaced Jon Cunliffe, voted in favor of the status quo on rates for her first meeting as an MPC member.
RISKS ON THE ECONOMY, WAGES AND GEOPOLITICS
Regarding the economic outlook, the BoE said it was determined to quell the threat of a wage-price spiral, which would be detrimental in its fight against inflation.
Even though inflation fell from 11.1% just over a year ago to 6.7% in the most recent data, it remains more than three times higher than the 2% target. of the BoE.
The central bank said it now expects stagnation in the British economy between July and September and growth of just 0.1% in the fourth quarter of 2023. It forecasts zero growth for 2024 and expansion of just 0. 25% in 2025.
Even with such an economic outlook, inflation would only fall to 2% at the end of 2025, around six months longer than previous forecasts.
Given the risk of recession in the British economy, investors believe that the BoE is done with raising rates in the current tightening cycle.
Before Thursday’s announcement, they forecast that the BoE would keep interest rates at the current level until August 2024, before an initial cut in the cost of credit.
The BoE showed no signs of reconsidering these forecasts: it said it expected inflation to fall to 4.8% in October, almost two points lower than in September, and to 4.6% in the fourth quarter of 2023.
The central bank, however, said it continued to closely monitor strong wage growth, which it fears could fuel inflation.
The central bank also noted “increasing uncertainties” around official labor market data, which has been hampered by low survey response rates.
The issuing institute nevertheless forecasts that the unemployment rate will increase from 4.2% to 5% in two years, based on the evolution of interest rates on the market.
(Report by William Schomberg and Andy Bruce, French version by Claude Chendjou, edited by Blandine Hénault and Kate Entringer)
©2023 Thomson Reuters, all rights reserved. Reuters content is the intellectual property of Thomson Reuters or its third party content providers. Any copying, republication or redistribution of Reuters content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters. Thomson Reuters shall not be liable for any errors or delays in content, or for any actions taken in reliance thereon. “Reuters” and the Reuters Logo are trademarks of Thomson Reuters and its affiliated companies.