The Bank of England has held the UK base rate at 5.25% following the unexpected fall in inflation revealed yesterday.
Andrew Bailey and his monetary policy committee colleagues voted by five members to four for the pause in the rate, reflecting how marginal the call was this time around.
The committee appears torn between a desire to clamp down on inflation and a fear that if they go too far with tightening conditions they will cause major damage to the economy.
The doves narrowly won the vote, with factors such as weak recent PMI data and a stalling housing market likely to have come into their considerations, alongside the headline inflation figure.
Hussain Mehdi, macro and investment strategist at HSBC Asset Management, said: “This was a very tough call for the MPC which is reflected in the 5-4 vote split. The surprise dip in August inflation and clear signs that that the UK economy is creaking under the pressure of higher rates are likely to have triggered a more dovish inclination among BoE policymakers.
See also: Unexpected fall in inflation opens door to Bank of England rate hold
“We believe there is now a good chance that the bank rate has peaked – a view we share for both the Fed and ECB policy rates. Although the latest UK pay growth numbers are a cause for concern, labour market data is lagging. Forward looking indicators suggest the UK economy is already flirting with recession, a backdrop consistent with cooling wage growth and a policy pivot.
“For us, we believe ongoing restrictive policy settings indicate there is a strong likelihood of developed markets entering recession in 2024,” Mehdi added. “Amid market pricing of a ‘soft landing’ scenario, this is consistent with a cautious and defensive positioning in portfolios. Nevertheless, the FTSE 100 index may find some insulation from its defensive characteristics, decent valuations, and energy exposure in an environment of rising oil prices.”
Jeremy Batstone-Carr, European strategist at Raymond James Investment Services, said: “Undoubtedly, the overriding factor behind the Bank’s decision has been the fall in the UK’s inflation rate in August, particularly the sharp drop in underlying price pressures which indicate that earlier rate increases are beginning to work.
“Moreover, the economy’s weakness in July means that activity over the third quarter has been revised downwards, below the Bank’s previous expectation,” he continued. “This is a clear sign that inflationary pressures, including wage pressures, will continue to abate over the autumn months.
See also: Unemployment rises but strong wage growth puts Bank of England in a quandary
“In addition, recent data points to a slight easing in the labour market, confirming a slight increase in the unemployment rate which now stands above the Bank’s forecast. Also serving to sway policymakers, recent business surveys point to further weakness in coming months. The MPC is likely to have had early sight of tomorrow’s purchasing managers’ survey, thought likely to confirm subdued activity across both the manufacturing and service sectors.”
Hugh Gimber, global market strategist at J.P. Morgan Asset Management, added: “What a difference a data point makes. Ahead of this week’s inflation print, a 25 basis point hike to UK interest rates was largely assumed as a done deal, with signals from the labour market in particular highlighting that more pressure on the economic brakes was required.
“Yet in light of today’s decision to hold rates stable, it seems that easing price pressures in the services sector have done enough to tilt the Monetary Policy Committee away from further action. Despite efforts in the statement to keep the door open to further hikes, many investors will now assume that the Bank of England’s hiking cycle has concluded.”
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