A member of the public walks through heavy rain near the Bank of England in May 2023.
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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 this 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 MPC’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.
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.
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 press conference as dovish, prompting a sizeable fall in short-term U.S. Treasury yields that spilled over into Europe and the U.K.
Two-year U.K. gilt yields slid to their lowest point since June ahead of the Bank of England’s decision on Thursday. Yields move inversely to prices.