On December 14, the Bank of England maintained its benchmark interest rate at 5.25%, in line with market expectations, marking a cumulative increase of 175 basis points this year.
Meeting records revealed that the Bank of England's Monetary Policy Committee voted 6:3 to keep the rate unchanged for the third consecutive time, mirroring the division seen in the November meeting. Three members still supported a rate hike, while no members voted for a rate cut.
The Committee reiterated its guidance that interest rates need to "remain sufficiently restrictive for a long enough period" to curb inflation, contrasting sharply with the new signals from the Federal Reserve.
The Committee also noted that further rate hikes might be necessary "if there is evidence that inflation pressures are more persistent," as inflation remains more than double the 2% target.
Bank of England Governor Andrew Bailey acknowledged that there is still a long way to go in the fight against inflation.
The Bank of England expects the inflation rate to be slightly below 4.5% by the end of 2023 (compared to the November forecast of 4.75% for the fourth quarter CPI), around 4.75% in January next year, and close to 4% in February.
The Bank stated that it is too early to conclude that the trends in service sector inflation and wage growth are on a downward trajectory.
The Bank of England anticipates the economy to be "broadly flat" in the fourth quarter and the upcoming quarters.
Since the November meeting, government bond yields have "significantly" declined, according to the Bank.
The British pound against the U.S. dollar (GBP/USD) rose shortly after the announcement, trading at 1.2710. Analyst Sofia Horta e Costa noted that the pound breaking through 1.27 reflects a slight decrease in market expectations for the Bank of England to cut rates next year. Four rate cuts of 25 basis points are still reflected in market prices, down from five earlier in the morning. While not a significant shift, this does suggest that the pound could be heading towards its best week in nearly a month.
Athanasios Vamvakidis, Global Head of G10 FX Strategy at Bank of America Global Research, commented that the main message from the Bank of England's statement is that interest rates will remain high as long as necessary. This effectively counters the market's early pricing of rate cuts. The statement aligns with market expectations but appears hawkish compared to the Federal Reserve's very dovish stance.
Guy Gittins, CEO of Foxtons Group, remarked that while hopes for a rate cut during the Christmas period might be optimistic, the third consecutive decision to keep the base rate unchanged will intensify the optimistic sentiment in the real estate market. Clear evidence shows that the property market has weathered the storm of economic uncertainty this year and is now taking positive steps in the right direction. Since the Bank of England's initial pause in rate hikes, there has been an increase in approved mortgage loans in the UK housing market, sellers continue to return to the market, and UK house prices have been steadily rising month by month.
