A Break in the Pattern
In a much-anticipated monetary policy decision, the Bank of England (BoE) broke its streak of 14 consecutive interest rate hikes. The decision was to hold the base rate steady at 5.25%. Interestingly, the committee vote that led to this conclusion was closely divided, with 5 members in favour of maintaining the rate and 4 voting for another increase.
Reading Between the Lines
While the decision itself was critical, the market was tuned into the undercurrents and implications of this verdict. The Bank's statement that policy must remain restrictive for "sufficiently long" was a strong indicator. It suggests the intention to keep interest rates high for an extended period.
This move by the BoE is understood better in the context of recent developments around inflation. After reaching a staggering 11.1% in October of the preceding year, headline CPI inflation has taken a downturn, falling by over 4 percentage points. Such a dip was evidenced in August's figures, which came in at 6.7% year-on-year, a pleasant surprise as it was lower than the consensus expectation of 7.0%.
Furthermore, the Prime Minister's ambitious aim of halving inflation from January's 10.1% to roughly 5% by year-end appears achievable. Economic forecasts are aligned, predicting an average inflation of 4.5% in the fourth quarter.
Potential Inflationary Pressures
However, one cannot overlook potential hurdles. A significant concern arises from the energy sector. Recent months have seen a surge in oil prices, with key players like Saudi Arabia and Russia prolonging their voluntary supply cuts. This decision is in addition to the cuts by OPEC+, which are set to continue until the end of 2024. As a result, consumers can brace for an uptick in petrol prices in the imminent future.
In the UK, another inflationary pressure stems from the rental market, which hasn't reached its peak. But, there's a silver lining. The change in the Ofgem price cap slated for October promises lower energy costs, a relief for households nationwide.
What Lies Ahead for the BoE?
Given the current trajectory, it seems the BoE might have reached the zenith of its hiking cycle. But is a rate cut on the horizon? Market trends suggest a possibility of a mere 25 bps reduction by mid-2024. This aligns with the prevalent sentiment that the BoE will uphold its stringent policy throughout 2024 to curb inflation.
An empirical study by the International Monetary Fund underscores the significance of this approach. Analysing over 100 inflation shock instances across 56 nations since the 1970s, the paper deduced that countries which successfully tamed inflation did so by consistently implementing restrictive policies. The BoE, along with other central banks, would be mindful of this historical data and would be wary of prematurely easing their monetary policies.
Immediate Market Reactions
The market had a mixed response to the BoE's decision. The pound experienced a dip, plummeting to a six-month low. Conversely, UK equities experienced a surge, buoyed by the announcement.
A note on dates. This piece analyses one meeting and the data available at the time. Rates, inflation and expectations have moved on since, and nothing below should be read as a current view of policy. The sections that follow explain how to read a decision of this kind, which remains useful whenever the next one arrives. For the current framework see our explainer on how the Bank of England sets interest rates.
A Hold Is a Decision
It is easy to read "no change" as an absence of action. It is not. The committee meets on a published schedule, considers the full range of options each time, and votes. A decision to leave the rate where it is has been argued for and carried, and the reasoning behind it is published alongside it.
This matters because a hold can mean quite different things depending on what accompanies it. A hold framed as a pause on the way to further increases is a different signal from a hold framed as the top of a cycle, which is different again from a hold framed as the last step before easing. The number is identical in all three cases; the guidance is not.
Reading a Split Vote
A closely divided committee is more informative than a unanimous one, because it tells you how finely balanced the arguments are and therefore how readily the next decision could go either way.
The published minutes record each member's vote and reasoning, which is unusual transparency by international standards and is deliberate: it makes the Bank accountable and helps markets understand the distribution of opinion rather than only its median. A narrow majority for holding, with a substantial minority arguing for a rise, indicates a committee that would move quickly if the data turned — and markets price accordingly.
The corollary is that a change in the vote split between meetings can be a stronger signal than the decision itself.
Why the Language Matters More Than the Number
Central banks treat communication as a policy tool in its own right, not merely as an explanation of decisions already taken. If households and businesses believe rates will stay high for a long period, they moderate spending, borrowing and wage-setting behaviour now — which does some of the work that further rate rises would otherwise have to do.
This is why a phrase such as "sufficiently long" is parsed so carefully. It is not decoration. It is an attempt to shape expectations of the path ahead, and the market response to a decision frequently owes more to the wording than to the number.
Headline Inflation Is Not the Whole Picture
A fall in headline inflation is welcome, and it is also the measure most influenced by things monetary policy cannot control. Energy and food prices move with global supply, weather and geopolitics; a sharp move in either can drag the headline figure up or down regardless of domestic conditions.
This is why committees look past the headline to the components that reflect persistent domestic pressure — services prices and wage growth in particular. Services inflation is labour-intensive and tends to be stickier than goods inflation; wage growth feeds directly into it. A headline figure falling while services inflation and pay growth remain elevated is precisely the combination that justifies caution rather than celebration.
Base effects add a further complication. When a large price increase from a year earlier drops out of the annual comparison, the rate of inflation falls even if prices are still rising at the same pace month to month. The headline number improves; the underlying situation may not have.
What a Plateau Means in Practice
If a cycle has reached its peak, the consequences differ sharply by asset and by circumstance.
Savers. Attractive cash rates are a feature of a high-rate environment, not a permanent one. The value of cash lies in its accessibility and certainty, and its purchasing power still erodes when inflation runs above the rate earned.
Mortgage borrowers. Fixed rates are priced off expectations of the future path rather than today's rate, which is why they can fall while the base rate is unchanged. Anyone approaching the end of a fixed period should be looking at options well ahead of the renewal date rather than at the point of it.
Bond investors. A peak in rates is generally supportive of bond prices, and longer-dated bonds respond most. The same sensitivity that produced heavy losses in a rising cycle works in the other direction when rates fall — which is a reason to hold duration deliberately rather than accidentally.
Equity investors. Here the link runs through two channels at once, and they frequently pull against each other. Lower expected rates raise the present value of future profits, which supports valuations. But rates fall when the outlook weakens, which lowers the profits being valued in the first place. Which channel dominates depends on the company and on why rates are moving, and it is the reason a peak in rates does not translate reliably into a rise in share prices.
Why Sterling Fell While Equities Rose
The simultaneous move in opposite directions puzzles people, and the explanation is straightforward once the channels are separated.
A decision read as the end of a tightening cycle lowers the expected future path of rates. Lower expected returns on sterling assets reduce the incentive for capital to flow into the currency, and it weakens. Meanwhile, a large share of the revenue of the biggest UK-listed companies is earned abroad, so a weaker pound flatters those earnings when they are translated back into sterling — and lower expected rates reduce the discount rate applied to future profits generally.
Two different mechanisms, one announcement, opposite-looking outcomes. This is normal rather than contradictory.
What It Means If You Live Abroad
- Sterling income or a UK pension spent elsewhere. A shift in the expected rate path moves the exchange rate, changing your effective income without anything in your own circumstances changing.
- A UK mortgage held from overseas. The cost is in sterling; the income servicing it may not be.
- Sterling cash held for a UK purpose. Worth reviewing both the rate earned and whether the purpose is still denominated in sterling.
- Drawing on UK investments abroad. Both the underlying valuations and the conversion rate respond to rate expectations, sometimes in the same direction and sometimes not.
What Not to Do
Markets are forward-looking, and a widely anticipated decision is largely priced before it is announced. What moves markets is the surprise — in the decision, the vote split or the language. Repositioning a long-term portfolio after a well-signalled cycle is often trading on information that is already reflected in prices.
The more durable approach is to hold an allocation that works reasonably across a range of rate environments, and to act promptly on the things genuinely within your control: a fixed rate approaching renewal, cash sitting somewhere uncompetitive, or bond duration that is longer or shorter than you intended.
The value of investments can fall as well as rise and you may get back less than you invested. Interest rate forecasts are uncertain and markets frequently behave differently from expectations. This article is general information and does not constitute personal financial or investment advice.
The Asymmetry Behind "Sufficiently Long"
The phrase quoted at the top of this article says something about the Bank's reasoning as well as its intentions, and the reasoning is worth following, because it recurs at the peak of every cycle.
A committee at this point faces two ways of being wrong, and they do not cost the same. Ease too early and inflation reaccelerates: credibility built up across the whole tightening cycle is spent, expectations of future inflation drift upwards, and rates then have to go further than they otherwise would to recover the position. Hold too long and the economy is squeezed unnecessarily: activity slows more than intended, unemployment rises, and the remedy is a series of cuts that can be delivered comparatively quickly.
Both are real errors. The first is markedly harder to undo than the second, and that asymmetry is the whole of why the empirical work referred to above points where it does. A committee that has spent two years watching inflation run well above target will accept a period of excessive restriction rather than risk having to start the job again.
The practical use of this is in calibrating expectations rather than making forecasts. It implies that the final rise in a cycle usually arrives before the data unambiguously justifies stopping, that the first cut usually arrives later than the data alone would suggest, and that "the peak has probably been reached" is a considerably safer inference than "cuts are imminent". A plan built on the first of those stands on much firmer ground than one built on the second — a distinction that matters most in exactly the situation described here, where a market-implied path is showing cuts and the committee's own language is not.
In Conclusion
September's meeting proved pivotal, with the BoE holding the base rate at 5.25%. While the rate hiking may have plateaued, the Bank's restrictive stance on monetary policy is anticipated to persist in the foreseeable future, underscoring its commitment to tackle inflation.
Data Source: Refinitiv 21 September 2023
As the Managing Director of Global Investments, I bring 25+ years of expertise in finance, wealth management, and real estate. I specialize in portfolio diversification, deal structuring, and wealth preservation, delivering data-driven strategies for sustainable success in global markets.
This article is for general information only and does not constitute financial, legal or tax advice. Rules, prices and regulations change; verify current requirements with a qualified adviser before acting.