Bank of England Pauses in a Split Decision after 14 Straight Rate Hikes

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BoE Rate Hold

The Bank of England has been raising rates non-stop since December 2021, having delivered a cumulative tightening of 515 basis points, in fourteen straight meetings. In a watershed decision today though, the central bank kept rates unchanged at 5.25% in 4-5 split decision, with four members dissenting in favor of another 0.25% increase. [1]

Governor Bailey was amongst the policymakers who voted for the pause, emboldened by Wednesday's soft CPI figures, which beat estimates. The hold camp also took into account signs of loosening in the employment conditions.

The split decision highlights the challenges that the bank is facing. Inflation is coming down and officials expects it to fall "significantly further in the near term". It has already delivered a massive amount of tightening and the economy is in a bad shape. Every further hike aggravates fears of deterioration and of sparking a borrowing crisis. Mortgage costs have increase substantially and mortgages in arrears rose 28.8 y/y in Q2, according to last week's report by the FCA. [2]

On the other hand, inflation remains elevated and is not expected to fall below the 2% target for nearly another two years. At the same time, pay growth remains at historically high levels, feeding a wage-price spiral and making controlling inflation even harder.

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Given the above, the pause may prove premature and officials could have a hard time staying on the sidelines. They have definitely been wrong before. Back in May and at a period when officials were hiking reluctantly, Governor Bailey had said that "we are nearer to the peak than we were" [3]. However, this estimate quickly proved overoptimistic and the central bank was forced to reaccelerate the pace of tightening.

The Bank of England is notorious for its non-committal stance and that did not change today. It offered no forward guidance, sustaining the uncertain outlook. The Committee reiterated that "further tightening" in monetary policy "would be required", in case of more persistent price pressures.

GBP/USD fell yesterday on the Fed's hawkish hold and extended its lows today, following the BoE's pause. The move was not exactly a surprise, as bets of such outcome had increased after the CPI report, but it was against baseline forecasts.

Nikos Tzabouras

Senior Financial Editorial Writer

Nikos Tzabouras is a graduate of the Department of International & European Economic Studies at the Athens University of Economics and Business. He has a long time presence at FXCM, as he joined the company in 2011. He has served from multiple positions, but specializes in financial market analysis and commentary.

With his educational background in international relations, he emphasizes not only on Technical Analysis but also in Fundamental Analysis and Geopolitics – which have been having increasing impact on financial markets. He has longtime experience in market analysis and as a host of educational trading courses via online and in-person sessions and conferences.

References

1

Retrieved 21 Sep 2023 https://www.bankofengland.co.uk/monetary-policy-summary-and-minutes/2023/september-2023

2

Retrieved 21 Sep 2023 https://www.fca.org.uk/data/commentary-mortgage-lending-statistics-q2-2023

3

Retrieved 23 May 2024 https://committees.parliament.uk/oralevidence/13216/pdf/

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