On Thursday, the Bank of England restated its position, claiming that British interest rates will persist at elevated levels for an "extended period of time," in response to the US Federal Reserve's indication of a potential interest rate reduction in 2024.
The Monetary Policy Committee, with a 6-3 majority, voted in favor of maintaining rates at a 15-year high of 5.25%. Despite expectations of a rate cut, Governor of the Bank of England Andrew Bailey emphasized the existence of "room for action" to combat inflation.
While three members of the central bank supported the increase in borrowing costs, there was no discourse on rate cuts, reflecting the Bank of England's apprehension about the potential for more severe inflation in the UK compared to the US and euro area.
Despite indicators such as slowing wage growth and a 0.3% contraction in gross domestic product in October, the Bank of England voiced concerns about a potential recession leading up to the 2024 national elections.
Following the Fed's announcement on Wednesday, the pound strengthened by over half a percent against the US dollar, and British government bond prices partially retraced their gains.
Bailey highlighted that successive rate hikes had contributed to reducing inflation from over 10% in January to 4.6% in October. However, he noted that there is "still room for action" to fully bring inflation back to the 2% target.
The Bank of England anticipates a gradual reduction in interest rates to 4.25% over three years, but despite this announcement, investors continue to anticipate that the rates will reach this level by the end of the next year.
The bank's core stance, unchanged since November, underscores the expectation of a two-year timeframe for inflation to return to the target. Despite the anticipated short-term decline in inflation, long-term concerns persist.
Chancellor Jeremy Hunt's recent announcement of tax cuts is expected to bolster gross domestic product by a quarter of a percentage point in the coming years. That being said, the Bank of England suggests that its impact on inflation will be limited.
Chief economist of the Bank of England Huw Pill is the sole policymaker discussing the timing of rate cuts, indicating that market expectations for a first rate cut in August next year "do not seem totally unreasonable." Nonetheless, Bailey emphasized that it is still early to delve into discussions about the timing of rate cuts.
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