The Bank of England is expected to leave interest rates unchanged at 5.25% next week with economists expecting a prolonged pause backing the "higher for longer" mantra.
At its September meeting, the BoE’s Monetary Policy Committee voted by a majority of 5–4 to maintain rates after 14 successive hikes.
More decisive pause
Economists think the vote could be a more decisive pause next week, with Morgan Stanley (NYSE:MS) expecting a 6-3 vote in favour of a hold, and Bank of America pitching at 7-2.
UBS economist Anna Titareva agrees, "seeing a more convincing majority in favour of a pause compared to the September meeting, with possibly only a few dissenters (Mann and Haskel)."
Case for "higher for longer" intact
Morgan Stanley (NYSE:MS)’s Bruna Skarica said “the broader economic picture is similar to how the MPC described it in the September minutes: wage and underlying inflation pressures have likely peaked; economic momentum is slowing; the labour market is slackening.”
So, the case for "higher for longer" still seems to be there, she thinks, with no sign of inflation expectations drifting up either.
Bank of America’s Robert Wood agrees that rates will be put on hold.
“In our view the Bank of England’s high bar to a hike at next week’s meeting has not been breached.”
“Inflation and growth have been weaker than the BoE expected. Wage growth has surprised no further on the upside than last month. Uncertainty about the labour market data suggest BoE caution” Wood added.
Growth forecasts set to be lowered
Wood expects the BoE will likely cut its near-term growth forecasts because of weak recent data but also lower inflation predictions by 10 basis points taking the fourth quarter number to 4.8%.
Morgan Stanley agrees, expecting a downgrade to the near-term growth forecasts but a mild upgrade to the medium-term outlook.
UBS’s Titareva expects no changes to the MPC's forward guidance, with the focus on keeping policy "sufficiently restrictive for sufficiently long", while leaving the door open for further tightening "if there were evidence of more persistent inflationary pressures.”
A prolonged pause ahead - when will rates be cut?
With the broad consensus that interest rates have peaked, the debate shifts to when rates could start coming down.
Titareva expects the first rate cut in May 2024, of 25 basis points, albeit with the risk skewed towards a later cut. She points out that markets are only pricing in the first rate cut for December 2024.
BofA’s Wood expects the BoE to be on a very extended policy pause now, with the first rate cut not until February 2025.
“With the labour market easing gradually and growth weak, we think the BoE will conclude that policy is about right for now,” adding that “the bar for further hikes is probably high.” “Equally, unwinding labour market imbalances and bringing inflation sustainably back to the target will take time, in our view,” he said.
Morgan Stanley’s Skarica predicts a cut could come as early as May 2024.
She thinks that in February, the MPC will be able to plausibly forecast inflation at around 2% within a year's time.
“With higher frequency inflation measures consistent with the target too, and with the unemployment rate on a continued upward trajectory, the question of restrictiveness of the policy stance with rates at 5.25% will likely come into focus.”
She sticks with her forecast of 4.00% Bank Rate by the end of 2024.