(Bloomberg) -- The Bank of England left its benchmark lending rate at a 15-year high, ruling out any possibility of letting up on its fight against inflation for the foreseeable future.
The central bank's Monetary Policy Committee voted 6-3 to maintain the key rate at 5.25%. Dissenters pushed for another quarter-point increase to choke off what they saw as persistent upward pressures on prices, according to minutes of the decision released Thursday.
Governor Andrew Bailey and his colleagues agreed that a “restrictive” policy stance would be needed “for an extended period of time” to curb Britain's inflation rate, which remains triple the target and the highest in the Group of Seven nations. The remarks appeared to dash expectations among investors that the BOE could cut rates in the second half of next year, around the time Prime Minister Rishi Sunak is expected to gear up for a general election.
“It's much too early to be thinking about rate cuts,” Bailey said in a statement released with the decision. “Higher interest rates are working, and inflation is falling. We need to see inflation continuing to fall all the way to our 2% target. We've held rates unchanged this month, but we'll be watching closely to see if further rate increases are needed.”
The BOE's forecasts emphasized the point, noting that inflation would return to target in early 2025 if rates remain unchanged - at least half a year earlier than the estimate based on market assumptions for rate cuts starting in August.
Former US Federal Reserve Chair Ben Bernanke attended the meeting as an observer, part of his review into the BOE's forecasts and communications. Bailey and the UK central bank have come under heavy criticism failing to move quickly enough against inflation before it leaped to a four-decade high last year. Bernanke will make recommendations early next year. This MPC meeting was his first.
While officials avoided predicting a technical recession, they signalled the UK economy will stall in the coming year. Uncertainties in those estimates mean there is still a 50% chance of the recession which some analysts are already projecting.
The BOE described the profile for gross domestic product as “broadly flat” and “subdued.” GDP now is projected to record zero growth in 2024, down from the 0.5% expansion previously expected, and a paltry 0.25% gain in 2025. Growth this year was put at 0.5%, unrevised from August.
Unemployment is also expected to tick up more quickly, ending this year at 4.3% rather than the 4.1% previously expected as businesses make more cuts to cope with higher rates. By the end of 2026, the BOE thinks unemployment will be at 5.1%.
Job market figures are particularly sensitive both for Sunak's government and the BOE. At least 600,000 people dropped out of the workforce in the pandemic, forcing companies to bid up wages to attract staff after lockdowns ended.
Official data on the jobs market has been snarled by trouble at the Office for National Statistics in completing its surveys. It admitted that the Labor Force Survey was receiving too few responses to be reliable. In the minutes of their meeting, the MPC noted that “increasing uncertainties” around the ONS figures underlined the importance of considering a “wide range of data.”
The ONS earlier Thursday said it will interview 24,000 people for the LFS in December, up from 16,000 people currently, and seek to get responses from more households with young people who were overlooked by previous surveys. The ONS will stick with experimental data for November's report and seek to return to the LFS data in December.
That will add to difficulties BOE staff face in gauging the impact of rate rises on the economy. Officials estimate that just under half of their monetary tightening since December 2021 has trickled through into the economy. This is being felt most keenly in housing investment, as starts on new builds have slowed. Business investment is also feeling the squeeze, the BOE said. Consumer spending tends to take longer to react, it added, though noted there had already been a slump in consumer confidence.
The BOE remains worried about inflation, which has eased from a peak of 11.1% last year but remains uncomfortably strong at more than three times the 2% target. Bailey and the majority of the nine-member MPC noted upward pressures on wages remain a concern and that “a further rise in bank rate remained a possibility” if they persist, minutes of the meeting showed.
Inflation is, however, expected to fall to 4.6% by the end of the year - meaning Sunak should be able to claim victory on his goal of halving inflation over the course of the year.
One member of the MPC who voted with the majority, probably Swati Dhingra, felt that the risks of overtightening policy had continued to build and that the full force of rate rises to date has yet to be felt.
Three members of the MPC — Catherine Mann, Megan Greene and Jonathan Haskel — backed a further rate hike to 5.5%. They felt the labor market remained tight along with elevated measures of services inflation and wage growth. Sarah Breeden voted with the majority on her debut with the MPC.
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