Bank of England governor Andrew Bailey has insisted it is too soon to start thinking about cutting interest rates, despite encouraging progress on inflation.

Speaking to reporters shortly after the BoE left interest rates on hold at 5.25%, 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.”

Bailey also said he could not guarantee that borrowing costs had peaked, saying:

“I’m encouraged by the progress we’ve seen, don’t get me wrong, I’m very encouraged by the progress we’ve seen.

But it’s too early to start speculating that we’ll be cutting soon.”

Several City experts are explaining that the Bank of England is pushing back against market expectations for early rate cuts in 2024.

Dean Turner, chief Eurozone and UK Economist at UBS Global Wealth Management, predicts the first UK rate cut will come by next May, despite the hawkish words from the BoE today.

Turner says:

‘As expected, the BoE left interest rates unchanged and delivered the news with a hawkish message that inflation risks remain to the upside. Markets have moved a long way in recent weeks, bringing forward expectations for the timing of the next rate cut so some push-back was expected.

In our view, the hawkish tone from the Bank doesn’t square with fading inflation, a cooling labour market, and lacklustre growth. Thus, we continue to expect the BoE to cut rates next year as soon as the May meeting.

The pound rose following the announcement. In our view, the period of sterling strength has likely run its course and we would look to sell the upside against the US dollar from these levels.

Hetal Mehta, head of economic research at St. James’s Place, said:

“The Bank of England’s decision today to maintain a hawkish message sets it markedly apart from the Fed.

Underlying inflation is still uncomfortably high and the recent pricing of multiple rate cuts from early next year was clearly an easing of financial conditions that the BoE felt the need to push back against. The fall in wage inflation so far is not enough to be consistent with the 2% inflation target.”

And here’s Ed Hutchings, Head of Rates at Aviva Investors:

“Once again, the Bank of England kept rates at 5.25%, with no change to the 6-3 voting pattern, and similar language used to the last meeting in early November.

Going into the meeting and after the dovish Fed the day before, the market was pricing close to 1.25% of cuts in 2024. This is somewhat excessive, and we now would expect some of the size and speed of these cuts to be taken out.

he BoE seems keen to push back on markets getting carried away with cuts, which should largely be supportive for the currency, but elsewhere, gilt yields could well retrace some of their very recent excessive gains.

Medium-term however, with weaker growth and past hikes still yet to feed through, it’s getting clearer that this interest rate hiking cycle is close to, if not, done. This should in time ultimately be supportive for gilts.”

Is governor Andrew Bailey playing the role of the Grinch, in contrast to Fed chair Jerome Powell, who played Santa yesterday by hinting at US rate cuts in 2024?

Neil Wilson, analyst at Markets.com, suggests he may be.

He points to the market reaction, which shows investors are slightly trimming their forecasts for UK rate cuts in 2024:

Gilt yields firmer, sterling advancing further against the dollar – the BoE was a fair bit more hawkish than the Fed.

Markets trimmed bets on BoE rate cuts, down to 107bps of cuts by Dec ‘24 vs 115bps before, with the first cut now seen coming in June rather than May….rather like the Fed, only in the other direction.

But this could be a sign that the markets have misread the situation. With the UK economy shrinking in October, and the jobs market softening, there could be scope for the BoE to cut early next year.

Wilson adds:

Probably I would argue right now that the market is seeing the BoE as more hawkish than maybe it should, and the Fed likewise more dovish.

The pound has surged over $1.27 against the US dollar, up almost a cent today.

That’s the highest level since 4 December, and close to the three-month high set at the end of August.

That highlight the difference in tone between the Bank of England this lunchtime, and the US Federal Reserve last night, although both central banks left borrowing costs on hold.

Yesterday, the Fed softened its language, with chair Jerome Powell telling reporters that the US benchmark rate was now “likely at or near its peak for this tightening cycle”.

Today, though, the BoE has said that the decision whether to increase or to maintain Bank Rate at this meeting was “again finely balanced” (see 12.12pm), with three of its nine policymakers wanting interest rates to be even higher (see 12.05pm).

As the Bank states:

The Committee continued to judge that monetary policy was likely to need to be restrictive for an extended period of time.

So while the Fed appeared to pivot last night, the Bank of England is holding a harder line (or at least trying to…).

Interestingly, the Bank of England also lays out a case for why the UK is facing a more inflationary environment than the eurozone or the US.

It says that underlying inflation (stripping out food and energy) is higher in Britain than across either the Atlantic or the Channel. Wage inflation is also running hotter here, it points out.

In the minutes released at noon today, the Bank says:

According to the flash estimate, annual euro-area headline HICP inflation had fallen to 2.4% in November. Energy and food prices had contributed to the decline, and core goods and services price inflation had also declined such that core inflation had fallen to 3.6%.

In the United States, headline CPI inflation had fallen to 3.1% in November, with energy price deflation contributing to the decline. Core CPI inflation had remained more stable in recent months, at 4.0%, as core services price inflation had eased more slowly.

Relative to both economies, core inflation had fallen back by less in the United Kingdom, to 5.7% in October, reflecting smaller declines so far in core goods price inflation and more elevated services price inflation.

To the extent that they were broadly comparable, measures of wage inflation were also considerably higher in the United Kingdom than elsewhere, even though there were signs of easing in all three economies.

The Bank says the decision whether to increase or to maintain Bank Rate at this meeting was “again finely balanced”.

On the one hand, there was a risk of not tightening policy enough when “underlying inflationary pressures could prove more persistent”.

But, there’s also a risk of tightening policy too much given the impact of policy that was still to come through, the Bank adds.

The Bank of England has also warned that it could raise interest rates higher, if needed, to fight inflation.

The minutes of this month’s meeting of the MPC state that the Bank’s policymakers would tighten policy further if they saw signs of “more persistent inflationary pressures.”

The minutes say:

The MPC will continue to monitor closely indications of persistent inflationary pressures and resilience in the economy as a whole, including a range of measures of the underlying tightness of labour market conditions, wage growth and services price inflation.

Monetary policy will need to be sufficiently restrictive for sufficiently long to return inflation to the 2% target sustainably in the medium term, in line with the Committee’s remit.

As illustrated by the November Monetary Policy Report projections, the Committee continues to judge that monetary policy is likely to need to be restrictive for an extended period of time. Further tightening in monetary policy would be required if there were evidence of more persistent inflationary pressures.

The Bank of England’s policymakers were split on today’s interest rate decision, again, with a trio of hawks pushing, in vain, to raise borrowing costs.

Six members of the monetary policy committee voted to leave rates at 5.25%. They were Andrew Bailey, Sarah Breeden, Ben Broadbent, Swati Dhingra, Huw Pill and Dave Ramsden.

But Megan Greene, Jonathan Haskel and Catherine Mann voted against the proposition, preferring to increase Bank rate by 0.25 percentage points, to 5.5%.

That’s the same split as last month.

Newsflash: The Bank of England has left UK interest rates ON HOLD at 5.25%.

This means borrowing cost are still at a 15-year high, as policymakers try to squeeze inflation out of the economy.

Details to follow….