BoE likely to keep high rates on hold even as signs of slowdown mount

By William Schomberg

LONDON (Reuters) – The Bank of England looks set to keep interest rates on hold next week but also stress that it is far from relaxing its fight against Britain’s high inflation rate, despite growing worries about a recession.

The BoE’s job of getting inflation down to its 2% target from 6.7% in September – the highest among the world’s rich economies – has been complicated by uncertainty about how much of the impact of its 14 rate hikes to date has yet to be felt.

Governor Andrew Bailey and his colleagues are expected by economists polled by Reuters and by investors to keep Bank Rate at a 15-year high of 5.25% on Nov. 2, repeating September’s decision when they put their long run of rate increases on hold.

The last Monetary Policy Committee meeting in September resulted in five members voting to pause, just outnumbering the four who sought another increase. One of the four dissenters will be replaced at November’s meeting, leading several economists to predict a 6-3 vote for a pause.

James Smith, an economist with ING, said the BoE – like other central banks – will want to ram home its message that it will not be cutting rates any time soon, despite the growing signs that the economy is flat-lining.

Data published on Tuesday showed another fall in employment and further weakness among businesses.

“They won’t want to take any chances and they really don’t want to see markets price in rate cuts,” Smith said. “Data has started to go tentatively in their favour but central banks have learned inflation data has tended to come in on the upside.”

So far, investors are not challenging the BoE’s message that interest rates will stay high for a considerable period.

BOE Chief Economist Huw Pill likened the outlook for monetary policy to the lofty, flat and long profile of Table Mountain during a visit to South Africa in late August.

Investors are do not see a greater than 50% chance of the BoE cutting rates until September 2024, two or three months later than markets are pricing for a first rate cut by the U.S. Federal Reserve.

But Pill has also said the outlook – like the top of Table Mountain on many days – is shrouded in cloud, giving the BoE room to help the economy if it slows more quickly than expected.

‘VERY SUBDUED’

The BoE will update its quarterly forecasts which in August showed economic growth of just 0.5% in both 2023 and 2024. Bailey spoke this month of a “very subdued” outlook.

The International Monetary Fund has said Britain is set to record the slowest growth among Group of Seven economies in 2024 with the BoE probably having to keep borrowing costs high.

Despite the lack of growth momentum, inflation’s fall from a peak of 11.1% a year ago has been slower than hoped, especially by Prime Minister Rishi Sunak who has promised voters it will be halved this year, before a national election expected in 2024.

Headline inflation failed to come down at all in September. Price growth in the services sector, which largely reflects stubbornly high wage pressures, accelerated.

Although inflation is expected to resume its fall in October, reflecting the surge in energy prices a year ago, rising global oil and gas prices, caused by the conflict in the Middle East, may add to inflation pressures ahead.

But economists expected little change in the BoE’s previous forecasts that inflation will fall to 2% in two years’ time.

Bailey last week said the latest inflation figures were not far off the central bank’s expectations and a slowdown in core inflation was “quite encouraging”.

“Recent geopolitical events will probably induce a modicum of monetary policy caution, reinforcing the likelihood of unaltered policy settings,” analysts at NatWest Markets said.

Bailey and other MPC members will hold a news conference at 1230 GMT on Nov. 2, half an hour after their decision on rates and their new forecasts are published.

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