Commentary Directory

The Bank of England (BoE) has held its Bank Rate at 5.25%, halting a series of rate hikes initiated in December 2021. The decision, which passed with a narrow 5-4 vote, also included a reduction in the rate of quantitative easing, decreasing UK government bond purchases by £100 billion to £658 billion over the next year. This move follows a surprising dip in UK CPI inflation rates, particularly in services inflation. While the Monetary Policy Committee (MPC) acknowledged the unexpected decline in inflation, it also highlighted the volatility of certain segments like airfares during the summer. The MPC is closely monitoring the labor market, wages, and inflationary pressures, emphasizing the significance of labor market conditions, wage growth, and services price inflation in guiding future BoE decisions. The asset purchase reduction was anticipated, aligning with market expectations.

The minutes of the MPC describe the situation best: “For most members within this group, the latest developments meant that the judgement to keep Bank Rate unchanged at this meeting rather than increase it was finely balanced.” While the pause feels decisive, it was not by any means, and because of that, it really does feel like this week’s inflation release made a huge difference in the voting today. Since the BoE has adopted this hyper-data-dependent mode, it should be no surprise that a reversal in the disinflation trend as demonstrated by future data would likely cause a reversal on the sentiment of the MPC. For now, however, the members can rest on the fact that the lagging nature of monetary policy suggests that much of that tightening has yet to make a major impact yet. The hope is that inflationary pressures will respond to these restrictive conditions and continue to trend the right direction.