The Bank of England has held the UK base rate at 5.25% today in a move that was fully expected.
The Monetary Policy Committee voted by a majority of 6-3 for the hold on rates, suggesting there is some disagreement between the members on policy.
While inflation remains some way above the 2% target level at 6.7% there are already signs of significant weakness in the economy, with unemployment creeping up and PMIs showing contractions.
The central bank is also mindful of the time lag between raising rates and their impact on the economy, which means it may have already tightened conditions enough, or even too much.
Jonathan Sparks, CIO – UK and Channel Islands at HSBC Global Private Banking & Wealth, said: “We’re not surprised that Bank of England has decided to hold interest rates at 5.25% for a second consecutive time as the BoE is in no mood for rocking the boat and the market is expecting this rate to be held until at least the middle of 2024. In our current forecast we doubt the BoE will even cut until 2025.
“Looking ahead, the world is in shock, and uncertainty is high as events in the Middle East continue to unfold. If the conflict were to escalate, the BoE’s response would vary depending on whether they saw inflation of growth as the greater risks. Further reason for the BoE to pause and monitor the potential risks.
“Additionally, elevated bonds yields have already done some of the heavy lifting for central banks in the second half of this year and with inflation set to fall considerably from here, it makes sense to take stock and monitor the spread of higher rates through the economy.”
Parmenion’s Meera Heardon commented: “No surprises the Bank of England has paused for breath. But their cautious tones of late suggests we’re not out of the woods, and that means they won’t hesitate to embark on further rate rises if needed, particularly as some signals such as wage growth remains stronger than expected.”
Emma Mogford, fund manager, Premier Miton Monthly Income fund, added: “I feel increasingly confident we are now at peak rates. The rapid increase in interest rates in the last year will continue to bring down demand for goods and services and hence inflation, which the Bank of England expects to be back at 2% in two years.
“If inflation can fall while the economy is resilient, that should be good for UK equities.”