BoE leaves rates unchanged as inflation falls towards its target

The BoE MPC voted to keep the Bank Rate unchanged at 5.25% at its February meeting. Six members of the MPC voted in favour of the decision, with two members preferring to raise rates and one member preferring to cut them. In comparison to the December meeting, in which six members voted to keep policy unchanged and three voted to increase rates, February’s meeting can be viewed as a marginally dovish shift by the MPC.

This was supported by updated inflation projections (see Chart 1). In November, the BoE expected inflation to fall back to its 2% target around the beginning of 2026. The February Monetary Policy Report brought that projection two years forward to Q2 2024.¹ 

Chart 1. BoE inflation projections (% change, year-on-year)

Source: Bank of England. Data as at 01 February 2024.

However, it is important to note that the bank expects this decline to be temporary and directly accounted for by the contributions of energy prices to headline inflation. Inflation is expected to rise again in the second half of the year before gradually declining to the BoE’s 2% target in Q4 2026.

Furthermore, the MPC remains concerned about the persistence of underlying domestic inflationary pressures. In that regard, they view services prices and wage growth as crucial factors. Although both measures have been slowing and this trend is expected to continue, they remain elevated (see Chart 2).

Chart 2. Services inflation and private sector pay growth (% change, year-on-year)

Source: Bank of England. Data as at 01 February 2024.

Because of this, the BoE highlighted that “monetary policy will need to remain restrictive for sufficiently long to return inflation to the 2% target sustainably”.²

What is meant by “sufficiently long” remains a key question for markets. In this regard, the MPC’s messaging was similar to that of the Federal Open Market Committee the previous day: “the Committee will keep under review for how long the Bank Rate should be maintained at its current level”.^{3, 4} The BoE will remain data dependent, with the timing of the first rate cut likely hinging on the incoming services inflation and wage growth data.

The magnitude of rate cuts is also important to markets. It is interesting to note that the BoE produces two sets of forecasts. The first is conditioned on the market implied path for the Bank Rate and the second is conditioned on the Bank Rate remaining unchanged (see Chart 3). By the end of 2025, inflation conditioned under the first assumption is above the bank’s 2% target, while inflation conditioned under the second assumption is below it.⁵ Hence, it can be implied that barring any new economic shocks, the future path of interest rates in the UK is likely to be somewhere in between the two.

Chart 3. UK interest rates used to condition forecasts in February monetary policy report (%)

Source: LSEG Data & Analytics and Bank of England. Data as at 01 February 2024.

In summary, inflation in the UK is falling and this trend is expected to continue over the coming months due to base effects from energy prices. However, once these effects dissipate, headline CPI inflation is expected to rise again, highlighting that underlying inflation remains above the BoE’s 2% target. The bank is looking closely at services inflation and wage growth to monitor this. Thus, until these factors slow further, the MPC will not cut interest rates.

¹ https://go.pardot.com/e/931253/report-2024-february-2024-vs-2/3x592/324289351/h/4ZAxjlrHi_OeJCZyVnMx0VHRe4--s_6iXoxBOSBuELQ
² https://go.pardot.com/e/931253/and-minutes-2024-february-2024/3x595/324289351/h/4ZAxjlrHi_OeJCZyVnMx0VHRe4--s_6iXoxBOSBuELQ
³ https://go.pardot.com/e/931253/and-minutes-2024-february-2024/3x595/324289351/h/4ZAxjlrHi_OeJCZyVnMx0VHRe4--s_6iXoxBOSBuELQ
⁴ See EFGAM Macro Flash Note, ‘January FOMC meeting’ (February 2024): https://go.pardot.com/e/931253/2024-january-fomc-meeting-html/3x598/324289351/h/4ZAxjlrHi_OeJCZyVnMx0VHRe4--s_6iXoxBOSBuELQ
⁵ Inflation conditioned on the market implied path for rates is forecast to fall to 2.6% in Q4 2025 and conditioned on a 5.25% Bank Rate it is forecast to fall to 1.7%.