![The Bank of England in London today](https://media.guim.co.uk/f8486f15ae07c2810fe01579e0ea30910cffe667/0_198_3500_2101/1000.jpg)
Closing post
Time to recap, at the end of a busy couple of days for central bankers.
The pound has climbed to its highest level since late-August, after the Bank of England tried to play down hopes that interest rate cuts are coming soon.
Sterling has hit $1.276 against the US dollar, up over one cent today and on track for its best day in a month.
It rallied after the Bank of England left UK interest rates on hold at 5.25%, a 15-year high, as expected. But the decision was a 6-3 split vote – with three policymakers voting to raise rates to 5.5%.
Andrew Bailey, the Bank’s governor, insisted it was too early to consider lowering borrowing costs despite the strain on an economy that contracted in October.
Bailey said:
“So my view at the moment is, it’s really too early to start speculating about cutting interest rates. We’ve got to see more progress.”
But despite such hawkishness, the money markets are still forecasting UK interest rates will fall by at least one percentage point next year.
That’s despite the BoE warning that the UK is facing a tougher job to crush persistently high inflation than other advanced economics, such as the US and the eurozone.
Andy Burgess, fixed income investment specialist at Insight Investment, says:
“Although the UK economy does face more embedded inflationary pressures than the US, we find it hard to believe that the Bank of England will follow through on its hawkish tone with the market pricing in 1.5% of rate cuts in the US and is at odds with the 4 rate cuts priced into the UK by the end of 2024.
What is more believable is the idea that UK rates are likely to decline, albeit at a slower pace than elsewhere as the Bank works to increase its credibility with investors in 2024. Gilt yields gave back some of the gains made following the Fed meeting but are likely to continue to be heavily influenced by the global rates environment.”
Here’s the full story:
The dollar also weakened against other currencies, after the US Federal Reserve signalled last night that it is moving closer to cutting rates.
Policymakers in the US expect to cut interest rates three times in 2024 – the market, though, was pricing in six quarter-point cuts.
Economists said the Bank of England’s monetary policy committee had maintained a hawkish message today, that sets it markedly apart from the Fed.
Philip Shaw of Investec says:
One [MPC] member, presumably Swati Dhingra, warned that the risks of overtightening had ‘continued to build’. This sentiment though is very much a minority view on the committee.
Indeed BoE Governor Andrew Bailey separately added that ‘there is still some way to go’ in the fight to bring inflation under control.
Overall the messaging continues to indicate that the Bank of England remains a central bank with a bias towards tightening, at least for now.
This may mean there is little relief for mortgage holders in the short term, given borrowing costs have already dropped from their summer highs:
The European Central Bank followed the BoE’s lead by leaving interest rates on hold, with president Christine Lagarde saying the ECB should “absolutely not” lower its guard against inflationary pressures.
Coming on the back of the last 24 hours’ significant UK-US divergence in monetary policy, the @ECB came out much closer to the @BankOfEngland than the #FederalReserve by…
— Mohamed A. El-Erian (@elerianm) December 14, 2023
Pushing back against market pricing of early 2024 cuts; and
Expressing more concern about the risk of…
In other news…
The cost of living squeeze is hitting Christmas; a traditional festive meal could cost 13% more than last year, with everything from turkey to sprouts rising sharply in price, reflecting high energy bills and poor growing conditions for vegetables.
The boss of Currys has accused the government of failing to understand or care about UK retailers by pushing through a “big hike” in the UK’s minimum wage.
Campaigners are calling for tighter rules to ensure that the imported “used” cooking oil that airlines hope will power cleaner flights is not in fact virgin palm oil.
Thames Water has appointed a former British Gas executive as its new boss with a pay package of up to £2.3m a year and a brief to turn around the heavily indebted utility.
A plan to test the use of hydrogen to heat homes in a village in the north-east of England has been abandoned after months of strong opposition from concerned residents.
New direct high-speed train routes from London to Cologne, Frankfurt, Geneva and Zurich could be up and running within five years, according to the Eurotunnel owner, Getlink, after work to double the capacity of UK rail links to Europe.
Updated
The charity behind National Debtline has warned that the impact of high UK interest rates “has already taken hold” for struggling households in Britain.
David Cheadle, acting chief executive at the Money Advice Trust, says millions of mortgage holders are struggling with higher payments, while others on fixed-term deals will face the shock of a steep increase in mortgage repayments in the future.
Cheadle adds:
“People who rent are not immune from the impact, and many have seen their rents jump as rate rises are passed on by landlords.
“As the cost of essentials seems set to remain high across the board, as we see at National Debtline, for people on the lowest incomes, budgets are no longer able to stretch.
“If you are struggling with your mortgage repayments, reach out to your lender – there is help they can offer.
“And if you are worried about paying your mortgage or any other bills, speak to an adviser at National Debtline from our advisers who can talk you through the right options for you.”
FTSE 100 finishes up 1%
The UK’s blue-chip share index has finished the day at its highest closing level since mid-October.
The FTSE 100 has racked up a two-month closing high, finishing 100.5 points higher at 7,648 points, a gain of 1.3%.
That’s its best day since the start of November, with traders cheering the prospect of several cuts in US interest rates next year.
The FTSE 100 had been up 2% at one stage, on track for its best day of 2023, before the Bank of England dampened hopes that it was eying interest rate cuts.
The stronger pound has weighed on the share price of exporters.
Fawad Razaqzada, market analyst at City Index and FOREX.com, says:
Investors were already in a cheerful mood on Wall Street, and they rejoiced the dovish signals the Fed provided them on Wednesday, with the FOMC’s dot plots pointing to three rate cuts in 2024, and effectively ruling out further rate increases.
That caused global stocks to extend their recent gains, while causing the dollar to slump. The fact that the FTSE jumped at the open on Thursday morning, while most GBP crosses fell, meant that traders were expecting to see a more dovish Bank of England today.
But that’s not precisely what happened, as the BoE was a bit more hawkish. This caused the FTSE to come off its earlier highs.
The Bank of England could tweak its tone on future interest rate cuts at its next scheduled interest rate decision, at the start of February.
So argues Melanie Baker, senior economist at Royal London Asset Management:
“The Bank of England’s Monetary Policy Committee (MPC) again flagged that the decision to hold or hike was ‘finely balanced’. The minutes do not mention that there was any discussion of rate cuts, though it sounds as if one MPC member might have been close to voting for a cut: ‘For one member, the risks of overtightening policy had continued to build’.
“The MPC doesn’t have a press conference in December and doesn’t publish its own rate forecasts. Still, the overall tone was quite a contrast to the relatively dovish-sounding Federal Reserve last night.
“The committee continues to judge that risks to their inflation forecasts are on the upside and although there were definite dovish elements to some of the economic commentary, they still see it as too early to conclude that services inflation and pay growth are on a firm downward path.
“Overall, there wasn’t much change in tone from the Bank of England today, but the February Report will be accompanied by their annual “stocktake” of supply capacity so would probably be the more likely time to expect a bit of a shift in tone.”
The pound isn’t the only currency having a good day.
The euro has also rallied, up over one cent against the US dollar to $1.099.
The euro is strengthening after the ECB left interest rates on hold, and president Christine Lagarde said interest rate cuts had not been discussed in Frankfurt.
David Page, Head of Macro Research at AXA Investment Managers, predicts the Bank of England will cut UK interest rates by three-quarters of a percentage point in 2024, and again in 2025.
Following today’s interest rate decision, Page says UK rates are at their peak (despite the Bank hinting that they could rise further if needed). He says:
The BoE left policy unchanged at 5.25% as expected, with the Committee split 6-3, 3 voting for more hikes.
The MPC minutes were much tighter in terms of urging caution around the rate outlook. Downside data was met conditionally, upside risks were flagged.
Of course, with core inflation at 5.7% and wage growth in excess of 7%, the Bank has more cause for concern over inflation persistence.
We do not expect the BoE to raise rates further and see 5.25% as the peak in this cycle.
Yet we expect the MPC to want to see labour market data around the Spring before considering easing policy.
We forecast the first rate cut in August (later than the markets’ May) and expect 75bps by end-2024 and a further 75bps by mid-2025.
Updated
Pound highest since August
In the financial markets, the pound has now climbed to its highest level since August.
Sterling has hit $1.275 against the US dollar, extending its earlier gains.
This follows the news that the Bank of England has left interest rates on hold, but that three of its nine policymakers voted to raise borrowing costs.
Traders are noting Andrew Bailey’s comments today that it is too early to consider cutting UK interest rates.
HOWEVER, the money markets are pricing in at least four cuts to UK interest rates in 2024.
The latest pricing shows that Bank rate is forecast to fall to 4.1%, down from 5.25% – implying at least four quarter-point rate cuts. Before the BoE’s announcement at noon, the City forecast five quarter-point cuts.
Katharine Neiss, chief European economist at PGIM Fixed Income, says:
“The Bank of England’s Monetary Policy Committee continues to walk along the summit of ‘Table Mountain’, with the Bank Rate unchanged at 5.25%. The hawkish tone continues, with three MPC members voting for a further rate hike, and no MPC member voting for a cut.
The policy statement acknowledges that the inflation challenge is greater in the UK than in either the US or Euro area. Moreover, risks to inflation remain to the upside, with upside risks from energy prices due to the geopolitical landscape a particular worry. Domestically, risks to wage growth have yet to recede, and the recent declines in headline inflation reflect subcomponents that the Bank of England judges to be poor indicators of underlying inflation.
That said, the statement does acknowledge inflation has come down, that monetary policy is ‘restrictive’ with slack in the economy opening up. Perhaps most notably, for one voting member, ‘the risks of overtightening policy had continued to build.’ That suggests that while the Bank of England may not yet be ready to pivot a la the Fed, it may be willing to do so sooner rather than later.”
Updated
Back in Frankfurt, Christine Lagarde has suggested that greedflation pressures may be easing.
During today’s press conference, the ECB president pointed to signs that profits are having a smaller impact on inflation.
She said:
“We have seen the contribution from profit unit to inflation declining in 2023... if that is confirmed, and it’s a big if... it will be really good news for inflation.”
Back in March, the ECB said it was closely monitoring potential price gouging of consumers.
Analysis: How long can Andrew Bailey hold line on interest rates?
The UK’s inflation problem is unique and cannot be likened to the US or the eurozone, the Bank of England argues in its latest health check of the UK economy today, my colleague Phillip Inman reports from the Bank.
In a message that signalled interest rates could increase again before they start falling, the Bank said there are considerable price pressures in the UK that are absent in most of the its main competitors.
And for that reason, while interest rates might fall next year in the US and the eurozone, the first rate cute in the UK is a long way down the track.
In his letter to Jeremy Hunt, the governor of the Bank, Andrew Bailey used tough language to explain why monetary policy will need to be “restrictive for an extended period of time”.
He described the main pressure on prices being generated by high wage demands, mostly in the services sector.
He said the UK inflation rate, far from tumbling, may increase in January, such is the influence of sustained wage increases in the services sector.
The central bank acknowledged that recent data has shown the labour market weakening and wages growth slowing. However, its interpretation of this trend is that far from showing signs of a dramatic decline, wages remain sticky and need to fall much further before interest rate cuts can be considered.
This outlook contrasts with the view of investors, who are betting Bailey and his colleagues will soon buckle to demands for lower rates.
Financial markets took their lead this morning from comments by Federal Reserve chair Jerome Powell that the course of interest rate policy was about to pivot away from increases to a series of cuts.
Stock markets soared after new forecasts from Federal Reserve officials pointed to 0.75 percentage points of cuts next year.
Bailey argues that zero growth in the UK next year and something close to zero in 2025 will be a sign of too much resilience. Interest rates will need to remain high.
In this view, the Bank almost stands alone. Telling the world it will ignore the global trend for reducing borrowing costs transforms what until now has been a gap between the Bank’s rhetoric and the financial markets into a chasm.
There will be analysts who say the Bank has lost control of the narrative before and looks like doing so again.
Right now, the financial markets are unconvinced by the Bank’s stance that a weakening economy is no reason to cut interest rates.
When the Fed has signalled it will be cutting soon in response to low prices growth and tumbling inflation in the eurozone will likely persuade the European Central Bank to do the same next year, how can Bailey hold out?
Updated
The rally in London’s stock market has lost some of its zip, after the Bank of England sounded more hawkish than investors had hoped.
Shares are still higher, with the FTSE 100 index up 113 points or +1.5% to 7661 point.
That puts the Footsie on track for its best day since October. Earlier this morning, when investors were cheered by the Federal Reserve’s dovish tone yesterday, it was on track for its best day this year.
Back in Frankfurt, Christine Lagarde has insisted that the ECB did not discuss cutting interest rates at all, at this month’s meeting.
There was no discussion, and no debate, on this issue at all, Lagarde said.
There is “a whole plateau, a whole beach” where policymakers can hold interest rates, rather than raising or lowering borrowing costs, Lagarde points out
She compares it to phase changes in physics, explaining that you don’t go from solid to gas without going through the liquid phase.
Updated
Video: Andrew Bailey pledges to do 'what it takes' to bring inflation down to 2%
Back in London, the Bank of England have released a video in which governor Andrew Bailey explains why rates were left on hold at 5.25% today.
Bailey points out that the Bank has raised interest rates five times this year, so it chose to leave borrowing unchanged “because previous increases in interest rates are working and inflation is moving in the right direction”.
He explains:
That’s supported by the conversations we have with businesses around the country about the pressures they face on their costs, and their pricing decisions.
But there is still more to do, Bailey insists, saying:
We need to get inflation all the way back to 2%, and we are likely to need to keep interest rates higher for a while longer to do that.
We’ve come a long way in the last 12 months, and will continue to do what it takes to get inflation all the way down to the 2% target.
Interest rates remain at 5.25%. Andrew Bailey explains the decision of the Monetary Policy Committee below. pic.twitter.com/ZMXKHMHTn2
— Bank of England (@bankofengland) December 14, 2023
Christine Lagarde in Covid-recovery mode
In Frankfurt, ECB president Christine Lagarde is holding a press conference now, where she’ll explain why eurozone interest rates have been left on hold today (see earlier post).
She starts by asking for the press pack’s indulgence, as she is in “Covid recovery mode”.
Sporting a natty scarf, and sounding a little weaker than usual, Lagarde says she didn’t want to miss today’s governing council meeting, or the press conference – but if she starts “coughing my life out”, vice-president Luis de Guindos will take over.
Lagarde promises she’s not contagious; it’s “just acute bronchitis”.
Proper ECB vibes with Lagarde announcing, in an uncharacteristically tepid voice, that she is recovering from Covid. See you in the new year basically,.
— Claus Vistesen (@ClausVistesen) December 14, 2023
Lagarde then reads out the prepared statement, in which she warns that the risks to growth are skewed to the downside, while upside risks to inflation include geopolitical tensions.
Hilillo de voz de Lagarde. Se disculpa porque está en proceso de recuperación del Covid pic.twitter.com/1zZ8QcQQ8n
— Rubén J. Lapetra (@rjlapetra) December 14, 2023
Updated
What UK’s interest rate freeze means for mortgage borrowers
Mortgage borrowers will be able to breathe a sigh of relief after Thursday’s announcement that the Bank of England has decided to hold rates at 5.25% – but amid the good news was a hint that the cost of home loans may not fall much further.
The Bank’s decision to hold rates was no surprise to the money markets, which are anticipating cuts next year. The consensus is that the base rate will fall to 4% in the next 12 months, but before today’s announcement some economists suggested it could drop to as low as 3.75%.
However, for the second month running, three of the nine members of the Bank’s Monetary Policy Committee voted for an increase, and the central bank said that, if needed, it would take that action to fight inflation.
For borrowers, that could mean mortgages are almost as cheap as they are going to be in the short-term…..
More here:
Over in the US, the number of Americans filing new claims for unemployment benefit has dropped.
There were 202,000 initial claims filed last week, a drop of 19,000 from the previous week.
Tha indicates the US jobs market remains solid – good news for workers, but could that take pressure off the Federal Reserve to cut rates next year?
US initial jobless claims 202K vs 220K estimate
— CGTN Europe (@CGTNEurope) December 14, 2023
European Central Bank holds rates
Newsflash: interest rates have also been held across the eurozone.
The European Central Bank’s Governing Council has decided to keep its three key ECB interest rates unchanged.
It says that “while inflation has dropped in recent months, it is likely to pick up again temporarily in the near term”.
And the ECB is also sticking to its belief that rates are high enough to help bring down inflation, saying:
Based on its current assessment, the Governing Council considers that the key ECB interest rates are at levels that, maintained for a sufficiently long duration, will make a substantial contribution to this goal.
The Governing Council’s future decisions will ensure that its policy rates will be set at sufficiently restrictive levels for as long as necessary.
The ECB has also cut its inflation forecasts, as expected.
It predicts inflation will average 5.4% in 2023, before dropping to 2.7% in 2024, 2.1% in 2025 and 1.9% in 2026.
ECB Will Set Interest Rates At Sufficiently Restrictive Levels
— LiveSquawk (@LiveSquawk) December 14, 2023
- Sees 2023 Inflation At 5.4%; Prior Forecast 5.6%
- Sees 2024 Inflation At 2.7%; Prior Forecast 3.2%
Today’s decision means the interest rate on the ECB’s main refinancing operations remain at 4.5%.
Its deposit facility, which determines the interest that commercial banks receive for depositing money with the central bank overnight, remains at a record high of 4%.
The marginal lending facility – charged by the ECB when commercial banks ask for short-term loans – remains at 4.75%.
BoE's Bailey says it's too early to talk about rate cuts
Bank of England governor Andrew Bailey has insisted it is too soon to start thinking about cutting interest rates, despite encouraging progress on inflation.
Speaking to reporters shortly after the BoE left interest rates on hold at 5.25%, Bailey said:
“So my view at the moment is, it’s really too early to start speculating about cutting interest rates. We’ve got to see more progress.”
Bailey also said he could not guarantee that borrowing costs had peaked, saying:
“I’m encouraged by the progress we’ve seen, don’t get me wrong, I’m very encouraged by the progress we’ve seen.
But it’s too early to start speculating that we’ll be cutting soon.”
The Treasury have issued a response to Bank of England interest rate vote, which appears to endorse the decision not to lower borrowing costs today.
A HM Treasury spokesperson said:
“We have turned a corner in our fight against inflation and real wages are rising, but we must keep driving inflation out of the economy to reach our 2% target.
“By cutting taxes for hard working people and businesses, and helping people into work, we are forecast to deliver the largest boost to potential GDP on record.”
Hawkish BoE: What the experts say
Several City experts are explaining that the Bank of England is pushing back against market expectations for early rate cuts in 2024.
Dean Turner, chief Eurozone and UK Economist at UBS Global Wealth Management, predicts the first UK rate cut will come by next May, despite the hawkish words from the BoE today.
Turner says:
‘As expected, the BoE left interest rates unchanged and delivered the news with a hawkish message that inflation risks remain to the upside. Markets have moved a long way in recent weeks, bringing forward expectations for the timing of the next rate cut so some push-back was expected.
In our view, the hawkish tone from the Bank doesn’t square with fading inflation, a cooling labour market, and lacklustre growth. Thus, we continue to expect the BoE to cut rates next year as soon as the May meeting.
The pound rose following the announcement. In our view, the period of sterling strength has likely run its course and we would look to sell the upside against the US dollar from these levels.
Hetal Mehta, head of economic research at St. James’s Place, said:
“The Bank of England’s decision today to maintain a hawkish message sets it markedly apart from the Fed.
Underlying inflation is still uncomfortably high and the recent pricing of multiple rate cuts from early next year was clearly an easing of financial conditions that the BoE felt the need to push back against. The fall in wage inflation so far is not enough to be consistent with the 2% inflation target.”
And here’s Ed Hutchings, Head of Rates at Aviva Investors:
“Once again, the Bank of England kept rates at 5.25%, with no change to the 6-3 voting pattern, and similar language used to the last meeting in early November.
Going into the meeting and after the dovish Fed the day before, the market was pricing close to 1.25% of cuts in 2024. This is somewhat excessive, and we now would expect some of the size and speed of these cuts to be taken out.
he BoE seems keen to push back on markets getting carried away with cuts, which should largely be supportive for the currency, but elsewhere, gilt yields could well retrace some of their very recent excessive gains.
Medium-term however, with weaker growth and past hikes still yet to feed through, it’s getting clearer that this interest rate hiking cycle is close to, if not, done. This should in time ultimately be supportive for gilts.”
Is Andrew Bailey a bit more of a Grinch?
Is governor Andrew Bailey playing the role of the Grinch, in contrast to Fed chair Jerome Powell, who played Santa yesterday by hinting at US rate cuts in 2024?
Neil Wilson, analyst at Markets.com, suggests he may be.
He points to the market reaction, which shows investors are slightly trimming their forecasts for UK rate cuts in 2024:
Gilt yields firmer, sterling advancing further against the dollar – the BoE was a fair bit more hawkish than the Fed.
Markets trimmed bets on BoE rate cuts, down to 107bps of cuts by Dec ‘24 vs 115bps before, with the first cut now seen coming in June rather than May….rather like the Fed, only in the other direction.
But this could be a sign that the markets have misread the situation. With the UK economy shrinking in October, and the jobs market softening, there could be scope for the BoE to cut early next year.
Wilson adds:
Probably I would argue right now that the market is seeing the BoE as more hawkish than maybe it should, and the Fed likewise more dovish.
Pound hits $1.27 after Bank of England decision
The pound has surged over $1.27 against the US dollar, up almost a cent today.
The rally comes as traders react to the Bank of England’s insistance that interest rates must stay high to fight inflation.
That’s the highest level since 4 December, and close to the three-month high set in November.
This highlight the difference in tone between the Bank of England this lunchtime, and the US Federal Reserve last night, although both central banks left borrowing costs on hold.
Yesterday, the Fed softened its language, with chair Jerome Powell telling reporters that the US benchmark rate was now “likely at or near its peak for this tightening cycle”.
Today, though, the BoE has said that the decision whether to increase or to maintain Bank Rate at this meeting was “again finely balanced” (see 12.12pm), with three of its nine policymakers wanting interest rates to be even higher (see 12.05pm).
As the Bank states:
The Committee continued to judge that monetary policy was likely to need to be restrictive for an extended period of time.
So while the Fed appeared to pivot last night, the Bank of England is holding a harder line (or at least trying to…).
The British dissent to match Fed’s pivot. Sterling above $1.27 after BoE delivered hawkish pause. Looks difficult how long BoE will extend the narrative. pic.twitter.com/B9vOlukPeG
— Arnob Biswas (@ArnobBiswas18) December 14, 2023
Updated
BoE: Inflationary pressures higher in UK than US or eurozone
Interestingly, the Bank of England also lays out a case for why the UK is facing a more inflationary environment than the eurozone or the US.
It says that underlying inflation (stripping out food and energy) is higher in Britain than across either the Atlantic or the Channel. Wage inflation is also running hotter here, it points out.
In the minutes released at noon today, the Bank says:
According to the flash estimate, annual euro-area headline HICP inflation had fallen to 2.4% in November. Energy and food prices had contributed to the decline, and core goods and services price inflation had also declined such that core inflation had fallen to 3.6%.
In the United States, headline CPI inflation had fallen to 3.1% in November, with energy price deflation contributing to the decline. Core CPI inflation had remained more stable in recent months, at 4.0%, as core services price inflation had eased more slowly.
Relative to both economies, core inflation had fallen back by less in the United Kingdom, to 5.7% in October, reflecting smaller declines so far in core goods price inflation and more elevated services price inflation.
To the extent that they were broadly comparable, measures of wage inflation were also considerably higher in the United Kingdom than elsewhere, even though there were signs of easing in all three economies.
On the cost of living squeeze, the Bank of England predicts that CPI inflation is expected to remain near to its current rate [4.6%] around the turn of the year.
But it predicts that services price inflation will temporarily increase in January.
Bank: Decision was 'again finely balanced'
The Bank says the decision whether to increase or to maintain Bank Rate at this meeting was “again finely balanced”.
On the one hand, there was a risk of not tightening policy enough when “underlying inflationary pressures could prove more persistent”.
But, there’s also a risk of tightening policy too much given the impact of policy that was still to come through, the Bank adds.
The Bank of Engand’s staff expect GDP growth to be broadly flat in the final quarter of this year, and also over the coming quarters.
The minutes of this month’s MPC meeting say:
The Committee continues to consider a wide range of data on developments in labour market activity. Employment growth is likely to have softened, and there has been further evidence of some loosening in the labour market.
BoE: Further tightening in monetary policy may be required
The Bank of England has also warned that it could raise interest rates higher, if needed, to fight inflation.
The minutes of this month’s meeting of the MPC state that the Bank’s policymakers would tighten policy further if they saw signs of “more persistent inflationary pressures.”
The minutes say:
The MPC will continue to monitor closely indications of persistent inflationary pressures and resilience in the economy as a whole, including a range of measures of the underlying tightness of labour market conditions, wage growth and services price inflation.
Monetary policy will need to be sufficiently restrictive for sufficiently long to return inflation to the 2% target sustainably in the medium term, in line with the Committee’s remit.
As illustrated by the November Monetary Policy Report projections, the Committee continues to judge 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.
Bank of England split 6-3 again on interest rates
The Bank of England’s policymakers were split on today’s interest rate decision, again, with a trio of hawks pushing, in vain, to raise borrowing costs.
Six members of the monetary policy committee voted to leave rates at 5.25%. They were Andrew Bailey, Sarah Breeden, Ben Broadbent, Swati Dhingra, Huw Pill and Dave Ramsden.
But Megan Greene, Jonathan Haskel and Catherine Mann voted against the proposition, preferring to increase Bank rate by 0.25 percentage points, to 5.5%.
That’s the same split as last month.
Updated
Bank of England leaves rates on hold
Newsflash: The Bank of England has left UK interest rates ON HOLD at 5.25%.
This means borrowing cost are still at a 15-year high, as policymakers try to squeeze inflation out of the economy.
Details to follow….
The Bank of England interest rate decision will be announced in 5 minutes #BOE #UK #XAUUSD #GBPUSD
— lrene_xauusd (@lrene_xauusd) December 14, 2023
Stock markets are still rallying ahead of the Bank of England decision in 12 minutes’ time.
In London, the FTSE 100 share index is up 2.1% at 7705 points, up 157 points, on track for its highest close since late September.
Yesterday’s surprisingly dovish Federal Reserve meeting continues to lift spirits, as Susannah Streeter, head of money and markets at Hargreaves Lansdown, explains:
There is enthusiasm in the air that the punishing rate hikes of the last two years will start being reversed, sooner rather than later.
The Fed’s acknowledgement that cuts will come in 2024 has fuelled positivity. The FTSE 100 has surged on the open, with housebuilders making strong gains amid hopes that relief is on the way for the housing market. Energy giants are also making strides as oil prices recover.
As the 24 hours of crucial central bank decisions ticks down, policymakers are expected to keep showing more dovish tendencies but are still set to stay behind the market curve when it comes to expectations of looser monetary policy.
Updated
Clocks across the City of London are ticking towards noon, when the Bank of England will announce its final interest rate decision of the year.
Investors are still widely expecting the BoE to leave interest rates on hold, at 5.25%, as it tries to bring inflation down.
One former policymaker, Michael Saunders has predicted that the BoE will “want to talk tough” about the near-term outlook for tactical reasons, to “put a lid on pay deals”.
Saunders told Bloomberg TV this morning:
Many pay deals are set in the first few months of the year.
The Bank of England will want to talk tough, in order to try to ensure that firms set pay deals for the coming year at a significantly lower pace than what we’ve seen in the last year.
Yields on 10-year Treasuries have dropped by more than a percentage point in less than a month, to below 4%. pic.twitter.com/l1XFSlIBA0
— Lisa Abramowicz (@lisaabramowicz1) December 14, 2023
Government bond prices are rallying today, on expectations of interest rate cuts next year.
This is pushing down the interest rate, or yield, on both UK and US government debt. If borrowing costs are coming down next year, investors are prepared to accept a lower rate of return for holding these bonds.
So, the yield on two-year UK bonds has dropped to 4.24%, down from 4.37% on Thursday evening.
Ten-year UK gilts are strenthening too, with the yield dropping to 3.72% from 3.83% yesterday.
US Treasuries are also rallying, on forecasts that the Fed could cut US interest rates by 1.5 percentage points in 2024.
Yields on 10-year Treasuries have dropped by more than a percentage point in less than a month, to below 4%. pic.twitter.com/l1XFSlIBA0
— Lisa Abramowicz (@lisaabramowicz1) December 14, 2023
Today’s Bank of England interest rate decision is unlikely to be unanimous, City economists predict.
Last month, the Monetary Policy Committee voted by a majority of 6–3 to maintain Bank Rate at 5.25%.
Three MPC members, Megan Greene, Jonathan Haskel and Catherine Mann, voted to raise to 5.5%, but were outvoted by the other six who favoured no change.
Julien Lafargue, chief market strategist at Barclays Private Bank, predicts another split at noon today:
“Although the vote will likely still be split, we expect the Bank of England to maintain the Bank Rate at 5.25%.
In our view, the MPC will also likely reinforce its message that the current monetary policy stance is restrictive but that, with risks to inflationary pressures being tilted to the upside, it’s too early to think about interest rate cuts.”
Updated
World stock markets have hit their highest level in over 18 months this morning, as optimism over 2024 rate cuts spur shares higher.
Data provider MSCI’s 47-country world stocks index has hit its highest level since April 2022.
It jumped yesterday as the surprisingly dovish Federal Reserve fuelled a rally on Wall Street.
Global stock markets index MSCI All Country World only 7% below its all-time high from 16 November 2021.
— Michal Stupavsky, CFA (@MichalStupavsky) December 13, 2023
Trailing P/E 19x
Forward P/E 18x
EV/EBITDA 12x
EV/Sales 2.2x
Not cheap IMO! pic.twitter.com/8myeHKxCBL
There could be volatility in the financial markets in two hours time, when the Bank of England announces its decision on UK interest rates and publishes the minutes of this week’s meeting.
Kallum Pickering, senior economist at Berenberg, predicts the BoE might challenge market expectations for interest rate cuts next year:
In response to a strongly gas-related surge in inflation, the Bank of England (BoE) lifted its bank rate by 515bp to 5.25% between December 2021 and August 2023.
Short of a major and unlikely spike in inflation in the coming months, UK interest rates have likely peaked for this cycle. But the BoE’s policy intervention is not yet over. After raising the bank rate using open market operations, policymakers are now trying to prevent financial conditions from becoming too easy by influencing market expectations using open mouth operations.
When the BoE publishes the minutes of its December monetary policy meeting at 12:00 GMT today, expect policymakers to push back against rising expectations for rate cuts in 2024. If markets listen, it may prompt some temporary market volatility.
The weakness of the US dollar has pushed the pound up to its highest level in almost two weeks, at $1.266.
US dollar hits four-month low
The US dollar has dropped to a four-month low this morning, after the Federal Reserve signalled that US interest rates have peaked, and will fall in 2024.
The selloff has pushed the US dollar index (which tracks the $ against a basket of currrencies) to its lowest since mid-August, at 102.42 points.
Ricardo Evangelista, senior analyst at ActivTrades, says:
While there had been some persistent doubts about the Fed’s interest rate hikes, it has now become clear that the current cycle is over. Investors now want to know when the central bank will start cutting rates and how fast they will come down.
Speaking at the end of the two-day meeting, Jerome Powell began to lift the veil over the likely path for rates in 2024. This development was welcomed by the financial markets, dissipating some of the doubts that had been capping risk appetite.
Treasury yields fell, as did the US dollar, as investors priced in expectations of a rate cut as early as March, in a dynamic that may lead to further losses for the greenback.
Goldman Sachs are predicting the Bank of England will cut interest rates sharply in 2024, down to 3.75% by the end of the year.
That would imply six quarter-point rate cuts, or a smaller number of larger cuts (or a mix of the two).
Gurpreet Gill, macro strategist global fixed income at Goldman Sachs Asset Management, predicts the first cut will come next May, saying:
“Momentum in UK economic activity has stalled, with weakness across most sectors including consumer-oriented services—a pivotal driver of growth.
“We have also seen a noteworthy deceleration in wage pressures.
“The confluence of sluggish growth momentum and abating underlying inflation pressures mean we expect the Bank of England to initiate rate cuts from May 2024.
“We expect further easing throughout the year, culminating in a Bank Rate of 3.75% by the end of 2024.”
Updated
Surprise interest rate rise in Norway
Newsflash: Norway’s central bank has raised its benchmark interest rate by 25 basis points to 4.50%, surprising many investors.
Norges Bank lifted borrowing costs as it battled inflation, and says the policy rate will likely be kept at that level for some time ahead.
This rather bucks the wider mood in the markets towards rate cuts.
Governor Ida Wolden Bache explains:
“We see that the economy is cooling down, but inflation is still too high. An increase in the policy rate now reduces the risk of inflation remaining high for a long period of time. The policy rate will likely be kept at 4.5 percent for some time ahead.”
Of the 27 economists polled in advance by Reuters, 15 had expected rates to stay on hold on Thursday while a minority of 12 had forecast a hike to 4.50%.
NORWAY'S CENTRAL BANK RAISES KEY POLICY RATE TO 4.50% IN SURPRISE DECISION #News #Markets #NORWAY #live
— Capital Hungry (@Capital_Hungry) December 14, 2023
Updated
This weekend will mark the second anniversary of the Bank of England’s first interest rate hike since the pandemic.
On 16 December 2021, the BoE nudged up base rate to 0.25%, from the record low of 0.1%.
That proved to be the first of 14 rate hikes, which brought rates to their current 15-year high of 5.25% in August.
New data from Moneyfacts shows how this has driven up mortgage rates:
Since the start of December 2021, the average two-year fixed rate has risen from 2.34% to 6.04% and the average five-year fixed rate has risen from 2.64% to 5.65%.
On a 10-year fixed rate mortgage, the average rate has risen from 2.97% to 5.96% since December 2021.
The average standard variable rate (SVR) stands at 8.19%, up from 4.40% in December 2021.
Rachel Springall, Finance Expert at Moneyfactscompare.co.uk, says:
“The past two years have proven to be an unprecedented period of interest rate volatility for mortgages.
Those coming off a fixed rate deal and wishing to fix once more will likely have to cover a much higher mortgage repayment, with the average two-year fixed rate more than double what it was in December 2021.
The lingering cost of living crisis could also be playing havoc with first-time buyers’ ability to get a foot on the property ladder, and affordable housing remains in short supply. Borrowers feeling the squeeze would be wise to seek help before they fall behind on their repayments and lenders will need to work closely with customers to support them moving into 2024.
Almost every member of the FTSE 100 index is up this morning, showing the breadth of the rally.
A rare faller is weapons maker BAE Systems (-2.2%), while Primark owner AB Foods are down 0.6% and energy producer/supplier Centrica are down 0.1%.
2024 will be a year of interest rate cuts by major central banks, says Investec economist Ellie Henderson.
Henderson says that Fed chair Jerome Powell had a change of heart last night, “akin to Scrooge eventually embracing Christmas”, when he revealed that rate cuts were being debated.
This “brought joy of equity and bond markets alike”, with both shares and bonds rallying on Wall Street last night, and in Europe this morning.
Henderson adds:
Focus now turns to the Fed’s peers, with the BoE and the ECB also deciding policy today.
The question is whether they take Fed Chair Powell’s dovish lead or tread more carefully. Interestingly the Swiss National Bank removed a reference to the possibility of higher rates in its statement this morning, having maintained its policy rate at 1.75%. Either way, in the absence of an unexpected shock, last night all but confirmed expectations that 2024 will be the year of the cuts.
![The Swiss National Bank (SNB) in Bern.](https://media.guim.co.uk/5d195147bfae73561609319234418e0cdc67cf62/0_297_4966_2979/1000.jpg)
Switzerland’s central bank has left interest rates on hold this morning.
The Swiss National Bank voted to maintain its policy rate unchanged at 1.75%, saying that while inflationary pressure has decreased slightly there is still high uncertainty.
It says:
The SNB will therefore continue to monitor the development of inflation closely, and will adjust its monetary policy if necessary to ensure inflation remains within the range consistent with price stability over the medium term
The SNB also warned that the growth outlook for the global economy in the coming quarters remains subdued, while inflationary pressure is likely to continue to ease.
Mohamed El-Erian, chief economic adviser at Allianz, says we shouldn’t expect the Bank of England or the European Central Bank to hint at hefty rate cuts next year, as the Federal Reserve did last night.
El-Erian posts on X (formerly Twitter) that:
Today we get the outcomes of the ECB and Bank of England policy meetings.
While both will follow the Federal Reserve in leaving rates unchanged, don’t expect President Lagarde and Governor Bailey to follow Chair Powell in opening the door wide open to sizable and early rate cuts in 2024 -- and this despite the weaker economies in both jurisdictions relative to the US.
Today we get the outcomes of the @ECB and @BankOfEngland policy meetings.
— Mohamed A. El-Erian (@elerianm) December 14, 2023
While both will follow the #FederalReserve in leaving rates unchanged, don’t expect President @Lagarde and Governor #Bailey to follow Chair #Powell in opening the door wide open to sizable and early rate…
Shares are contining to climb in London, pushing the FTSE 100 index up by 169 points or 2.2% to 7717 points.
That puts the blue-chip index on track for its best day of the year (although we’re still early in the session…)
CMC: Santa comes early as Fed pivots.
Santa has come early to the financial markets, after the US Federal Reserve pivoted last night, and indicated that US interest rates will be cut several times in 2024.
The French and German stock markets have just hit record highs, as European shares jump – as we’ve seen in London already this morning.
Michael Hewson, chief market analyst at CMC Markets UK, explains:
It had been widely anticipated that Fed chairman Jay Powell’s main challenge yesterday would be in trying to push back on the idea that the US central bank was ready to cut rates sharply over the next 12 months. With the sharp fall in yields since November there was an expectation that the loosening in financial conditions might put the central banks fight against inflation at risk.
It was therefore quite surprising that yesterday’s statement and dot plots embraced that narrative, delivering an early Christmas present to the markets, returning the 2024 median for dot plots to 4.6%, back to where it had been in September, while forecasting core PCE to decline to 2.4%.
The US dollar sank, along with 2-year yields which fell 30bps to a 6-month low, gold surged back above $2,000 an ounce, and US markets pushed up to their highest levels this year, with the Dow posting a new record high, confounding market expectations of a hawkish pushback.
At the press conference Powell tried to give the impression that the Fed retained the option to hike rates again, however this message is rather undermined by the fact that the FOMC cut their dot forecasts as much as they did. The admission that the FOMC discussed rate cuts was also noteworthy.
If “higher for longer” wasn’t dead before last night, it certainly is now, and certainly makes the job of both the Bank of England, as well as the ECB later today that much harder in maintaining a hawkish bias,
The FTSE 250 index, which contains shares in medium-sized companies, has surged by 2.7% this morning to its highest level since the end of July.
FTSE 250 up over 2% & above previous high.#MCX $MCX pic.twitter.com/yQqAizqt7Y
— Justin Waite (@SharePickers) December 14, 2023
Electricals chain Currys are among the top risers, up 10%, after it stuck to its annual guidance this morning despite reporting an adjusted pretax loss of £16m for the six months to October 28.
Like-for-like sales fell 4%, with the UK & Ireland down 3% and the Nordics down 6%.
FTSE 100 hits two-month high
London’s stock market is rallying hard at the start of trading, as investor cheer last night’s dovish words from the Federal Reserve.
The FTSE 100 index of blue-chip shares has jumped by 136 points, or 1.8%, to 7686 points, the highest level in two months.
Grocery technology firm Ocado are the top riser, up 7.6%, with mining companies also in the top risers, reflecting hopes that interest rates will be cut aggressively next year.
Updated
Investors are also predicting a flurry of US interest rate cuts next year:
US rates are now expected to fall by 1.5 percentage points in 2024 – or six quarter-point cuts….
*TRADERS PRICE 150BPS OF FED RATE CUTS IN 2024 FOR FIRST TIME
— IGSquawk (@IGSquawk) December 14, 2023
…., which is twice as much as the Fed policymakers predicted in the forecasts released yesterday.
Latest Fed dot plot. 0.75% of interest rate cuts seen in 2024 median. Three observations: 1) A coherent set of projections - with higher downside growth risks & recent soft price data providing an easing path; 2) Stubborn refusal to shift long term estimate for Fed Funds Rate… pic.twitter.com/QOLScaLiLu
— Simon French (@shjfrench) December 14, 2023
Markets expecting five BoE rate cuts in 2024
Newsflash: Investors are expecting the Bank of England to cut interest rates more aggressively next year.
The money markets are now indicating that UK interest rates will have fallen to 4% by the end of 2024. That implies five quarter-point cuts next year, rather than the four expected yesterday.
There’s already been central bank action in the Philippines, but it wasn’t really an interest rate thriller in Manila.
The Philippine central bank left its benchmark interest rate unchanged at 6.5% for the second meeting in a row.
Bangko Sentral ng Pilipinas governor Eli Remolona told a press conference the central bank deemed it necessary to keep monetary policy settings tight but was ready to adjust that if necessary.
ING’s Nicholas Mapa explains:
Remolona indicated that they would be monitoring the response of households and firms to tighter monetary policy, suggesting they would be waiting to see the impact of previous rate hikes on the inflation path. The central bank will likely extend its pause until inflation is “well-within” target and until inflation expectations are anchored.
We expect the BSP to be on hold well into 2024, with potential rate cuts only likely to be considered towards the end of next year.
Introduction: BoE and ECB setting interest rates
Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
One down, two to go. It’s the Bank of England and the European Central Bank’s turn to set interest rates today, a day after the US Federal Reserve cheered investors with a clear signal it will cut rates next year.
Like the Fed, both the BoE and the ECB are very likely to leave interest rates on hold today.
But (also like the Fed) the focus will be on how quickly Europe’s major central banks will cut borrowing costs next year.
The money markets are indicating that ‘no change’ from the BoE at noon today is a 94% near-certainty, which would leave rates at a 15-year high of 5.25%
After all, UK inflation is more than double the Bank’s 2% target (at 4.6% in October). And after wage growth slowed in the last quarter, the Monetary Policy Committee will want to see more signs of easing price pressures.
But looking into 2024, the markets now expect UK rates to be cut by a full percentage point by the end of next December, to 4.25%. Yesterday’s news that the UK economy shrank in October has raised fears that Britain could be sliding into a recession
For the European Central Bank, the inflationary picture a litte more pleasing – consumer prices in the eurozone only rose by 2.4% in the year to November.
The ECB is expected to leave its deposit rate unchanged at 4.0%, while its inflation expectations could be revised down in the latest macro forecasts drawn up by its staff.
Last night, the Dow Jones industrial average closed at a record high, as traders cheered the news that most Fed policymakers expect US interest rates to be cut three times in 2024.
![Traders react after the closing bell on the floor at the New York Stock Exchange last night.](https://media.guim.co.uk/923f53829155a6bbb8f941dacb27f803589b7b32/0_0_3169_2113/1000.jpg)
This has bolstered hopes that the US can avoid a recession, as Jim Reid, strategist at Deutsche Bank, explains:
Yesterday’s FOMC meeting did its best to give investors an early Christmas present, all packaged with a bow and extra special gift wrapping. In turn this added more fuel to the soft landing narrative.
European markets are set to rally today too, with the FTSE 100 index forecast to rise almost 1%.
In a busy day for central banks, Switzerland and Norway are also setting rates today.
The agenda
8.30am GMT: Swiss National Bank interest rate decision
9am GMT: Central Bank of Norway (Norges Bank) interest rate decision
12pm GMT: Bank of England interest rate decision
1.15pm GMT: European Central Bank interest rate decision
1.30pm GMT: US retail sales for November
1.30pm GMT: US weekly jobless claims
1.45pm GMT: European Central Bank press conference
Updated