For the first time in almost two years, the BoE opted to leave borrowing costs at 5.25% today (21 September), while warning that rates will remain high to tackle inflation. The committee's decision was a close call, with five voting to pause, while four voted in favour of a 25bps hike.
"Enough voters were either satisfied that inflation will not prove to be overly sticky or were concerned enough about downside risks to believe that a pause was warranted despite still high levels of inflation," said Oliver Blackbourn, portfolio manager at Janus Henderson.
Investors had widely predicted the 15th rise in a row to 5.5% from 5.25%, but on the morning of the decision, only half of investors expected a rise, after it was reported on Wednesday (20 September) that UK inflation unexpectedly fell to 6.7% in August.
Bank of England holds rates at 5.25% in 5-4 split vote
While inflation eased last month and there were signs of a weakening labour market, wage growth, a key driver in prolonging high inflation, has risen to over 8%. Meanwhile, the UK economy contracted by more than expected in July, giving way to recessionary concerns.
Katharine Neiss, chief European economist at PGIM Fixed Income, said the BoE's decision to hold rates was "surprising", and noted this was the most dovish statement and decision seen from a major central bank recently.
"Not only did the BoE hold, but the statement was also very dovish, with no forward guidance nor sense that rates might need to go higher if inflation remains high," she said.
Janet Mui, head of market analysis at RBC Brewin Dolphin, also described today's decision as dovish, but noted the guidance was hawkish, "to dampen the expectation of a rate cut in 2024".
After today's hold, there is broad consensus among analysts this may have been the Bank of England's last interest rate hike in this cycle.
Rate rise remains likely despite surprise inflation fall to 6.7%
"Given the lack of signal from the latest policy decisions that rates could go higher, and with the immediate outlook likely to continue to come in weaker, our view is the BoE will not raise rates at its next meeting and will keep rates on hold for 5.25% for the foreseeable future," said PGIM's Neiss.
Hussain Mehdi, investment strategist at HSBC Asset Management, said that after the BoE's "tough call" today, there is now a "good chance" the bank rate has peaked, a view the firm shares for both the Federal Reserve and ECB policy rates.
However, other analysts, such as Rob Morgan, chief investment analyst at Charles Stanley, said the cycle of raising rates "may not be quite at an end".
"The BoE is conscious of going too far and inflicting more pain than necessary on the economy, but ultimately its primary job is to bring inflation back down, which means one more rate rise is possible before they plateau into next year to ensure rising prices are kept in check," he said.
Arguing the inflation battle is not fully won, Daniele Antonucci, CIO at Quintet Private Bank, said the peak in rates will probably be followed by central banks keeping rates elevated over the coming months.
Federal Reserve opts to leave rates unchanged but maintains hawkish stance
"We think these elevated rates will put further downward pressure on economic activity, and then, as it slows, central banks will lower rates in 2024 to support growth," he said.
Hugh Gimber, global market strategist at JP Morgan Asset Management, said the risk of today's decision is that the BoE "may yet be forced to apply the brakes more sharply at a later stage".
"With every step higher in interest rates, recent communication has highlighted that the risk of overtightening has become a greater factor in the Bank's decision making process," he said.
"Unfortunately, some weakening in activity is unavoidable in order to put the inflation genie back in the bottle."