LONDON — The Bank of England on Thursday left interest rates unchanged, but said monetary policy will likely need to stay tight for an "extended period of time."
The Monetary Policy Committee voted 6-3 in favor of keeping the main bank rate at 5.25%, with three members preferring another 25 basis point hike to 5.5%.
Earlier Thursday morning, markets were pricing around an 89% chance of a second consecutive hold, according to LSEG data, after the bank ended a run of 14 straight hikes in September.
"The MPC's latest projections indicate that monetary policy is likely to need to be restrictive for an extended period of time. Further tightening in monetary policy would be required if there were evidence of more persistent inflationary pressures," the MPC said in its Thursday statement.
Since the committee's last projections in October, inflation has weakened to 6.7% but remains well above the central bank's 2% target. Meanwhile, economic activity has softened considerably and the labor market has shown signs of loosening.
Bank of England Governor Andrew Bailey said Thursday that despite the progress on inflation, "there is absolutely no room for complacency" and that it is "still too high."
"We will keep interest rates high enough for long enough to make sure we get inflation all the way back to the 2% target. We will be watching closely to see if further increases in interest rates are needed, but even if they are not needed, it is much too early to be thinking about rate cuts," Bailey said.
In its accompanying Monetary Policy Report, the committee on Thursday noted that inflation has fallen below the expectations laid out in its August findings. The bank now expects the consumer price index to average around 4.75% in the fourth quarter of 2023 before dropping to around 4.5% in the first quarter of next year and 3.75% in the second quarter of 2024.
The U.K. GDP is anticipated to have flatlined in the third quarter of 2023, marking a weaker performance than the MPC had projected in August. The GDP is now expected to grow by just 0.1% in the fourth quarter, also weaker than anticipated in August.
"Since the MPC's previous decision, there has been little news in key indicators of U.K. inflation persistence. There have continued to be signs of some impact of tighter monetary policy on the labour market and on momentum in the real economy more generally," the MPC said in its statement.
It added that monetary policy will need to be "sufficiently restrictive for sufficiently long" to return inflation to the 2% target sustainably.
'We are now at peak rates'
Given these prevailing dynamics, several strategists were quick to suggest that the bank is now done with hiking. Emma Mogford, manager of the Premier Miton Monthly Income Fund, said she was "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," she said in an email.
"If inflation can fall while the economy is resilient, that should be good for UK equities."
This was echoed by Sam Zief, head of global FX strategy at JPMorgan Private Bank, who said that the MPC would likely be sitting on "Table Mountain" for a while, but that the next move will be to cut rates.
Suren Thiru, economics director at ICAEW, said that the Thursday decision and the increase in MPC members voting to hold, compared with the narrow 5-4 split of September, was "further evidence that rates have now peaked."
"While this interest rate hiking cycle may be over, the lagged impact of previous tightening means the protracted squeeze on mortgage holders, businesses and the broader economy is far from over," Thiru added by email.
"With the Bank of England expecting the economy to weaken further, the case for interest rate cuts is only likely to increase."
Economy 'on a knife edge'
British Chancellor of the Exchequer Jeremy Hunt separately said that the U.K. has been "far more resilient than many expected, but the best way to deliver prosperity is through sustainable growth."
"The Autumn Statement will set out how we will boost economic growth by unlocking private investment, getting more Brits back to work, and delivering a more productive British state," he added.
The U.S. Federal Reserve on Wednesday also kept rates unchanged and upgraded its economic growth assessment, with Chairman Jerome Powell insisting that the Federal Open Market Committee is not discussing rate cuts at this point.
However, markets interpreted his comments at the subsequent news conference as dovish and all but concluded that the Fed is done with its hiking cycle, prompting a sizeable fall in short-term U.S. Treasury yields that spilled over into Europe and the U.K. and propelled stock markets forward.
Yields on two-year U.K. government bonds, also known as gilts, slid to their lowest point since June ahead of the Bank of England's decision on Thursday. Yields move inversely to prices.
Michael Field, senior equity strategist at Morningstar, said that the bank's decision would come as a "small relief" for markets, but that any positivity had been "lost in the euphoria" of the news stateside.
"The U.K. economy, like much of Europe, is on a knife edge. Barely growing, but still experiencing elevated levels of inflation. Labour markets are tight, but consumers' pay packets have not kept up with inflation. From here we can only hope that inflation continues to fall at pace, making it easier for the Bank to start cutting rates," he said in an email Thursday.