Closing post
Time to recap, at the end of a busy couple of days for central bankers.
The pound has climbed to its highest level since late-August, after the Bank of England tried to play down hopes that interest rate cuts are coming soon.
Sterling has hit $1.276 against the US dollar, up over one cent today and on track for its best day in a month.
It rallied after the Bank of England left UK interest rates on hold at 5.25%, a 15-year high, as expected. But the decision was a 6-3 split vote – with three policymakers voting to raise rates to 5.5%.
Andrew Bailey, the Bank’s governor, insisted it was too early to consider lowering borrowing costs despite the strain on an economy that contracted in October.
Bailey said:
“So my view at the moment is, it’s really too early to start speculating about cutting interest rates. We’ve got to see more progress.”
But despite such hawkishness, the money markets are still forecasting UK interest rates will fall by at least one percentage point next year.
That’s despite the BoE warning that the UK is facing a tougher job to crush persistently high inflation than other advanced economics, such as the US and the eurozone.
Andy Burgess, fixed income investment specialist at Insight Investment, says:
“Although the UK economy does face more embedded inflationary pressures than the US, we find it hard to believe that the Bank of England will follow through on its hawkish tone with the market pricing in 1.5% of rate cuts in the US and is at odds with the 4 rate cuts priced into the UK by the end of 2024.
What is more believable is the idea that UK rates are likely to decline, albeit at a slower pace than elsewhere as the Bank works to increase its credibility with investors in 2024. Gilt yields gave back some of the gains made following the Fed meeting but are likely to continue to be heavily influenced by the global rates environment.”
Here’s the full story:
The dollar also weakened against other currencies, after the US Federal Reserve signalled last night that it is moving closer to cutting rates.
Policymakers in the US expect to cut interest rates three times in 2024 – the market, though, was pricing in six quarter-point cuts.
Economists said the Bank of England’s monetary policy committee had maintained a hawkish message today, that sets it markedly apart from the Fed.
Philip Shaw of Investec says:
One [MPC] member, presumably Swati Dhingra, warned that the risks of overtightening had ‘continued to build’. This sentiment though is very much a minority view on the committee.
Indeed BoE Governor Andrew Bailey separately added that ‘there is still some way to go’ in the fight to bring inflation under control.
Overall the messaging continues to indicate that the Bank of England remains a central bank with a bias towards tightening, at least for now.
This may mean there is little relief for mortgage holders in the short term, given borrowing costs have already dropped from their summer highs:
The European Central Bank followed the BoE’s lead by leaving interest rates on hold, with president Christine Lagarde saying the ECB should “absolutely not” lower its guard against inflationary pressures.
Coming on the back of the last 24 hours’ significant UK-US divergence in monetary policy, the @ECB came out much closer to the @BankOfEngland than the #FederalReserve by…
— Mohamed A. El-Erian (@elerianm) December 14, 2023
Pushing back against market pricing of early 2024 cuts; and
Expressing more concern about the risk of…
In other news…
The cost of living squeeze is hitting Christmas; a traditional festive meal could cost 13% more than last year, with everything from turkey to sprouts rising sharply in price, reflecting high energy bills and poor growing conditions for vegetables.
The boss of Currys has accused the government of failing to understand or care about UK retailers by pushing through a “big hike” in the UK’s minimum wage.
Campaigners are calling for tighter rules to ensure that the imported “used” cooking oil that airlines hope will power cleaner flights is not in fact virgin palm oil.
Thames Water has appointed a former British Gas executive as its new boss with a pay package of up to £2.3m a year and a brief to turn around the heavily indebted utility.
A plan to test the use of hydrogen to heat homes in a village in the north-east of England has been abandoned after months of strong opposition from concerned residents.
New direct high-speed train routes from London to Cologne, Frankfurt, Geneva and Zurich could be up and running within five years, according to the Eurotunnel owner, Getlink, after work to double the capacity of UK rail links to Europe.
Updated
The charity behind National Debtline has warned that the impact of high UK interest rates “has already taken hold” for struggling households in Britain.
David Cheadle, acting chief executive at the Money Advice Trust, says millions of mortgage holders are struggling with higher payments, while others on fixed-term deals will face the shock of a steep increase in mortgage repayments in the future.
Cheadle adds:
“People who rent are not immune from the impact, and many have seen their rents jump as rate rises are passed on by landlords.
“As the cost of essentials seems set to remain high across the board, as we see at National Debtline, for people on the lowest incomes, budgets are no longer able to stretch.
“If you are struggling with your mortgage repayments, reach out to your lender – there is help they can offer.
“And if you are worried about paying your mortgage or any other bills, speak to an adviser at National Debtline from our advisers who can talk you through the right options for you.”
