Bank of England sits tight

Please note: The article does not constitute advice or any form of investment recommendation. All numbers quoted were sourced from Bloomberg data as at Thursday 21 March 2024. Past performance is never a guarantee of future performance.

The members of the Monetary Policy Committee (MPC) did what was widely expected of them at March’s meeting and voted to keep the UK base rate at 5.25%.

In part, the predictability is testament to the Bank of England’s (BoE) clearer communications of late, regarding rate cut rationales. At the same time, external factors clearly forced the Old Lady’s hand. 

With UK inflation still stubbornly above the BoE’s 2% target, the collective appetite for cuts remains low. For now, caution is the name of the game on Threadneedle Street.  

As before, the vote wasn’t unanimous, but MPC members were overwhelming in favour of keeping the rate unchanged, voting 8-1. Only Swati Dhingra opted for a rate cut.   

The decision will keep the base rate at a 16-year high through March and April, and the MPC reconvenes on 9 May.

Surely, we’re nearly there?

The day before the MPC session, it was revealed that UK inflation in February dropped to 3.4%. This is down from 4% the month before, and less than the forecasted 3.5% - further proof that price pressures are waning. 

If that momentum is maintained, the case for rate cuts in the summer will strengthen. For now, the BoE doesn’t want to risk a premature move that undoes their progress. But it also knows that the longer it takes for rates to fall, the higher the risk that the economy will take a hit.  

As the MPC meeting minutes stated, signs that the inflation battle is being won are encouraging, but aren’t sufficient to merit a change in stance: “Headline CPI inflation had continued to fall back relatively sharply in part owing to base effects and external effects from energy and goods prices. The restrictive stance of monetary policy was weighing on activity in the real economy, was leading to a looser labour market and was bearing down on inflationary pressures. Nonetheless, key indicators of inflation persistence remained elevated¹.” 

Similar mindsets

As has been the case for a while now, the BoE is moving in lockstep with the US Federal Reserve (Fed) and the European Central Bank (ECB). All three institutions are in agreement about one thing – that interest rate cuts will come soon, just not yet.

The ECB President, Christine Lagarde, struck an uber cautious tone on Wednesday 20 March when speaking about potential rate cuts in 2024: “…even after the first rate cut, we cannot pre-commit to a particular rate path. However tempting that is. However much each of you would like to see it².” 

Likewise in the US, there has until now been hesitancy to commit to a rate cut glidepath but the mood seems to have turned. Despite the recent small rise in inflation, consensus now points to meaningful moves by the Fed in the second half of 2024. 

In the aftermath of the decision to keep US rates at a 23-year high of 5.25-5.5%, chair Jerome Powell said this when asked about higher inflation data: “We believe that our policy rate is likely at its peak for this type of cycle, and that if the economy evolves broadly as expected, it will likely be appropriate to begin dialling back policy restraint at some point this year³.”

Hold tight

The MPC’s latest decision didn’t reveal much ‘new news’. If anything, it reiterated what we’ve already commented on, hence why this article is relatively brief. 

For investors and savers, the window for locking in rates remains open for now. However, the clock is ticking, and we are edging ever closer to the time when those rates will start to fall. At the time of writing, markets are pricing in three cuts this year.

Meanwhile, for borrowers, the pain of a persistently high base rate goes on. The summer continues to be touted as a potential turning point, offering a glimmer of hope in the not-too-distant future. 

The BoE’s assessment of the outlook for the UK economy in 2024 was also broadly positive: “Having declined through the second half of last year, UK GDP and market sector output were expected to start growing again during the first half of this year. Business surveys remained consistent with an improving outlook for activity¹”. 

Updates and insights 

As always, we will keep you updated whenever there is something concrete to comment on – whether through our articles and podcasts.

As a follow-up, we summarised the big taxation changes that were announced for some international wealth holders, in The end of the non-dom tax status: What next?. 

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