The Bank of England’s Monetary Policy Committee (MPC) gears up for its concluding rendezvous of the year, a pivotal session to decide on interest rates that significantly impact mortgage rates across UK banks.
Having steadily increased interest rates over 14 consecutive meetings, the central bank reached a zenith with a 15-year high of 5.25%. These adjustments aimed to exert pressure on consumer spending and curb inflation. However, the MPC refrained from further hikes in both the September and November meetings following a discernible deceleration in inflation rates.
The imminent meeting arrives against the backdrop of recent economic indicators hinting at a cooling trend in the economy. The Office for National Statistics (ONS) unveiled that UK Gross Domestic Product (GDP) encountered a 0.3% dip in October, attributing this decline to adverse weather conditions impacting manufacturing and construction sectors. Concurrently, the ONS reported a notable slowdown in wage growth, marking the sharpest deceleration in two years. Private sector regular earnings, excluding bonuses, rose by 7.3% in the three months leading to October, down from the previous quarter’s 7.8%, signaling a softening labor market.
This economic shift has spurred economists to revise their forecasts, anticipating forthcoming interest rate cuts in the upcoming year. Initial estimations by financial markets foresaw a 0.75 percentage point reduction in interest rates for 2024. However, recent adjustments on Wednesday have escalated these expectations to a projected 1 percentage point drop, potentially driving interest rates down to 4.25% by year-end 2024.
Despite these recalibrations, experts maintain their anticipation of a status quo in the impending MPC vote and foresee a prolonged period of stability in the initial months of the New Year. Martin Beck, chief economic advisor to the EY Item Club, stressed that the lack of substantial economic shifts since the prior meetings in September and November does not foreshadow a different outcome. “December’s MPC meeting will almost certainly prove the third in succession to deliver no change in interest rates,” he remarked, citing the absence of significant economic surprises and a more pronounced slowdown in inflation and pay growth.
While recent data portrays a cooling inflation trend and subdued economic activity, the Bank of England remains guarded against immediate rate cuts. Governor Andrew Bailey and other MPC members have indicated a proclivity towards maintaining existing rates. Bailey, addressing the Treasury Committee last month, cautioned against underestimating the threat of UK inflation and reiterated the Bank’s concerns about persistent inflation, particularly in the services sector, where a majority of Britons allocate their expenditures. He hinted at an expected 6% inflation in this sector persisting through the onset of 2024.
James Smith, economist at ING, echoed these sentiments, anticipating the Bank’s reaffirmation of this stance. “Markets are pricing three rate cuts in 2024, and we doubt the Bank will be too happy about that,” Smith stated. He anticipated policymakers reiterating the necessity for sustained restrictive rates. However, acknowledging the limited scope for a messaging shift, especially with no scheduled press conference or forecasts accompanying Thursday’s statement and minutes, Smith suggested a constrained opportunity for substantial alterations.
Additionally, the Bank of England’s warning about potential repercussions from higher rates looms large. They cautioned that nearly a million individuals might witness a surge of over £500 in monthly mortgage repayments by the culmination of 2026, underscoring the enduring impact of increased rates on the economy.
As anticipation mounts for the MPC’s final meeting of the year, stakeholders across various sectors keenly await the outcome, hopeful for insights into the Bank’s strategy amidst evolving economic dynamics.