What’s happened?

On September 21st the monetary policy committee (MPC) of the Bank of England (BoE, the central bank) kept the policy interest rate on hold at 5.25%. This marks a pause in the monetary policy tightening cycle that began in December 2021, with the BoE having raised rates 14 consecutive times since then. The key question is whether this is a pause or the end of the tightening cycle. The MPC was split (four-three in favour of keeping rates on hold); we believe that inflation will prove sticky and that the BoE will raise interest rates once more, to 5.5%, either in November or December.

Why does it matter?

The announcement surprised many (including EIU) who had expected a 25 basis-point increase in interest rates at the September meeting. However, the release of inflation data on September 20th is likely to have been influential in the BoE’s decision: inflation had been expected to accelerate on the back of higher petrol and diesel prices, but in fact overall inflation edged down in August (to 6.7% year on year) owing to easing food prices. UK core inflation (excluding more volatile food and energy prices) also edged down to 6.2% from 6.9% in July.

Whether the BoE will now keep rates on hold or whether further tightening will be needed will depend on the trajectory of inflation. A downward adjustment to the energy price cap (effective from the start of October) will help to ease inflation, which is likely to counteract rising petrol prices. Core inflation is also likely to gradually cool as the tight labour market slackens somewhat (unemployment has risen modestly to 4.3% in July from its 2022 low of 3.7%).

The BoE’s decision follows a similar move by the US Federal Reserve (Fed, the US central bank) to pause its monetary policy tightening cycle, and, although the European Central Bank (ECB) opted for a 25-basis-point increase at its September 14th meeting, it indicated that the rise would probably be the last.

What next?

Despite the sharp slowdown in UK inflation, it remains higher than in the US (3.7%) and the euro zone (5.2%), so pausing monetary policy tightening is risky at this juncture. The BoE’s next move will depend on the course of inflation. Our baseline forecast is that the bank will increase rates once more, by 25 basis points, either in November or December. Rates are then likely to remain on hold throughout 2024, before moderate easing in 2025.

The analysis and forecasts featured in this piece can be found in EIU’s Country Analysis service. This integrated solution provides unmatched global insights covering the political and economic outlook for nearly 200 countries, enabling organisations to identify prospective opportunities and potential risks.