The Bank of England leaves interest rates unchanged

A member of the public walks in heavy rain near the Bank of England in May 2023.

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LONDON – The Bank of England on Thursday left interest rates unchanged, but said monetary policy would likely need to remain tight “for an extended period of time.”

The Monetary Policy Committee voted 6 to 3 in favor of keeping the key bank interest rate at 5.25%, while three members favored raising the interest rate by another 25 basis points to 5.5%.

Earlier this morning, markets were pricing in an 89% chance of a second straight flat, according to LSEG data, after the bank ended a string of 14 consecutive rises in September.

“The latest MPC forecasts indicate that monetary policy is likely to need to be restrictive for an extended period of time,” the Monetary Policy Committee said in its statement issued on Thursday. “Further monetary policy tightening will be needed if there is evidence of further pressures.” persistent inflation.

Since the Monetary Policy Committee’s last forecast in October, inflation has fallen to 6.7% but remains well above the central bank’s target of 2%. At the same time, economic activity declined significantly and the labor market showed signs of slowing.

In its accompanying monetary policy report, the committee noted on Thursday that inflation fell below expectations set in the August results. The bank now expects the consumer price index to average about 4.75% in the fourth quarter of 2023 before falling to about 4.5% in the first quarter of next year and 3.75% in the second quarter of 2024.

UK GDP is expected to remain flat in the third quarter of 2023, representing a weaker performance than the Monetary Policy Committee expected in August. GDP is now expected to grow just 0.1% in the fourth quarter, also weaker than expected in August.

“Since the previous decision of the MPC, there has been little news in the main indicators of continued UK inflation. There are still signs of some impact of tightening monetary policy on the labor market and on momentum in the real economy more generally,” the MPC said. He said in his statement.

He added that monetary policy must be “sufficiently restrictive for a long enough period” to return inflation to the 2% target sustainably.

British Chancellor of the Exchequer Jeremy Hunt said separately that the UK was “far more resilient than many expected, but the best way to achieve prosperity is through sustainable growth.”

He added: “The Autumn Statement will set out how we will boost economic growth by unleashing private investment, putting more Britons back into work and delivering a more productive UK nation.”

The US Federal Reserve on Wednesday also left interest rates unchanged and upgraded its assessment of economic growth, with Chairman Jerome Powell insisting that the Federal Open Market Committee is not discussing interest rate cuts at this stage.

However, markets interpreted his comments in the subsequent press conference as pessimistic, leading to a significant decline in short-term US Treasury yields that spilled over into Europe and the UK.

British two-year bond yields fell to their lowest levels since June ahead of the Bank of England’s decision on Thursday. Returns move inversely with prices.