Economists think interest rates are likely to now be at their peak after the Bank of England decided to leave the Bank Rate unchanged for the first time in nearly two years.
Slowing growth, a loosening in the labour market and – most recently – a surprise fall in inflation convinced Monetary Policy Committee (MPC) members that rates did not need to go any higher.
Although wage growth remains above the Bank’s target, minutes from the meeting revealed MPC members found it “difficult to reconcile” ONS pay data with other indicators which show pay growth is beginning to ease.
In the end, the slimmest of majorities backed a pause with those voting in favour saying the decision was “finely balanced”.
The question now is whether interest rates are at their peak.
The Bank was unclear, suggesting that it will be led by the data. If wage growth remains at record levels or if services inflation remains stubborn, then it will hike rates again. Rising oil prices could also compel the Bank to step into action.
Even if rates do not have to go any higher, the Bank made clear that rates will be higher for longer. “Monetary policy will need to be sufficiently restrictive for sufficiently long to return inflation to the two per cent target,” it confirmed.
But many economists argued the Bank had reached its peak. They did not doubt the Bank’s willingness to raise interest rates, but argued the data would not necessitate a further hike.
Paul Dales, chief UK economist at Capital Economics, predicted that core inflation and wage growth would continue to fall. This, Dales said, meant rates were “probably… already at their peak”.
Martin Beck, chief economic advisor to the EY ITEM Club, also thought further hikes were unlikely for similar reasons.
“Inflation should continue to fall, pushed down by lower energy bills, the lagged effect of deflation in producers’ input prices and a significant deceleration in money supply growth,” he said.
In other words, economists are increasingly confident that the 14 consecutive rate hikes up to this point will be sufficient to reduce inflation.
The rate hikes will also constrain growth. The UK economy has grown more slowly than the Bank’s August forecast, suggesting that rate hikes have taken the heat out of the economy.
The Bank’s own forecasts suggest the economy will only grow 0.1 per cent in the third quarter, lower than previous predictions.
Stumbling growth will put pressure on the Bank to ease monetary conditions, but most economists were confident that its higher for longer message was credible.
“Despite the tightening cycle reaching its peak, monetary policy will remain restrictive for some time” said Yael Selfin, chief economist at KPMG UK.
Dales argued that rates would not be cut until the second half of 2024.
Today’s decision does look like the end of the hiking cycle, but the battle to stamp out inflation is still very much ongoing.