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Bank of England expected to hold interest rates next week

Bank of England expected to hold interest rates next week
Emma Lunn
Written By:
Emma Lunn
Posted:
08/12/2023
Updated:
11/12/2023

The final Monetary Policy Committee (MPC) announcement in 2023 regarding the base rate is scheduled for Thursday 14 December.

Economists are generally expecting the committee to hold the base rate at 5.25%. The rate was held at 5.25% in November with the MPC voting by a 6-3 majority for no change. Three members preferred to increase it by 0.25 percentage points to 5.5%.

Deutsche Bank expects the same voting split this time. The bank’s chief UK economist Sanjay Raja predicts that MPC members Catherine Mann, Jonathan Haskel, and Megan Greene will vote for a quarter point hike, while the six other members of the committee will vote for the rate to be held.

Raja said: “Since the bank’s November Monetary Policy Report (MPR), market conditions have shifted, but economic data have remained broadly in sync with the bank’s most recent projections. The one bright spot for the MPC is inflation, which surprised lower on headline, core, and services CPI.

“The MPC will very likely retain its tightening bias, while reiterating its ‘higher for longer’ message that rates will need to remain ‘sufficiently restrictive for sufficiently long’. The risk? Some more explicit push back against market pricing, given the MPC’s view of upside inflation risks.”

Deutsche Bank also predicted no changes to the bank’s quantitative tightening (QT) sales strategy.

Regarding when the UK will see interest rates start to fall, Raja said “Rate cuts still expected from Q2-24, but risks of a delay are mounting. We continue to think that bank rate has peaked. And more importantly we still think rate cuts will come from Q2-24 onwards – albeit at a gradual pace. However, our conviction levels have fallen. Wage stickiness and upcoming changes to CPI (from weights to source data) could end up delaying the start of any easing cycle.”

‘Wait-and-see mode on base rate’

Deutsche Bank’s viewpoint on next week’s MPC meeting was echoed by analysts at investment firm AJ Bell and Capital Economics. AJ Bell predicted that the bank will “stay in wait-and-see mode.”

Ashely Webb, UK economist at Capital Economics, said: “The possibility that the labour market is tighter than it looked has placed a question mark over when the Bank of England will be able to cut interest rates. Our forecast for services inflation and wage growth to fall only slowly is why we don’t think interest rates will be cut before late in 2024. That said, if the bank shifts its focus towards more forward-looking indicators earlier than we expect, interest rates could be cut sooner.”

A poll by Reuters also predicted that the MPC will keep bank rate at 5.25% on 14 December and through the second quarter of 2024. All but one of 68 economists, in a Reuters poll taken in the first week in December expected the Bank of England to hold bank rate at 5.25% next week. Only one economist predicted a 25 basis point hike.