The market expects the UK’s apex bank to hold off on increasing or decreasing interest rates even as economic data is falling.
The Bank of England (BoE) is expected to hold UK interest rates on Thursday due to recorded price pressures and a decline in economic activity. At the moment, the market is pricing a 93% chance that the apex bank will not increase or reduce rates.
UK inflation came in at 6.7% in September, higher than analysts expected but unchanged from August’s figure. The BoE has increased interest rates 14 consecutive times since December 2021, moving the rate from 0.1% to 5.25%. The Monetary Policy Committee had previously voted 5-4 in support of a hold on rate hikes.
According to the S&P Global / CIPS Flash United Kingdom PMI released last week, recorded business activity fell for the third consecutive month in October. The release notes the eighth consecutive reduction in monthly manufacturing output, the longest decline since 2008/09. Chief Business Economist at S&P Global Market Intelligence, Chris Williamson, said:
“The UK economy continued to skirt with recession in October, as the increased cost of living, higher interest rates and falling exports were widely blamed on a third month of falling output.”
The release also showed a decline in both new work and backlogs and a reduction in private-sector employment for the second consecutive month.
UK Interest Rates May Still Rise
Allianz Global Investors Head of Macro Unconstrained Mike Riddell noted that the UK economy has slowed, with declines in consumer spending and the housing market. Although he notes that wage growth has increased, Riddell is not optimistic that the growth is sustainable because other indicators point to weakness in the labor market. While he believes the BoE will hold rates, Riddell does not think the hike campaign has been highly detrimental.
“No doubt the BoE will signal that rates can still rise if economic data indicates a need, but as voting member Swati Dhingra recently highlighted, the long lags between changes in monetary policy and their impact on the economy mean that only up to a quarter of all the BoE hikes in this cycle have made a dent on the UK economy so far.”
The general respite in the BoE’s decision to suspend hiking interest rates may not last. According to Monetary Policy Committee (MPC) member Catherine Mann, there is no guarantee that the Bank will not resume its hikes because of the continuous increase in the UK’s cost of living. Riddell has said that the market may never see rates below 4% ever again.
Last November, UK inflation fell from a 41-year high of 11.1% to 10.7%. It remained in the double digits in March and dropped under 10% in April for the first time since August 2022. The Office for National Statistics (ONS) noted that it had fallen to 8.7% from 10.1% the previous month. By June, it fell further to 7.9%, and reduced to 6.8% in July.
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