UK and Eurozone interest rates left unchanged, as expected

UK rate-setters appear less dovish than had been expected but ECB reinforces expectations of cuts next year.

14 December 2023

The Bank of England held rates at 5.25% for the third meeting in a row, widely in line with what markets expected. What was not perhaps as expected was the fact that three of the nine committee members voted for an increase in rates, corroborating Governor Bailey’s vocal message that there is still some way to go in the Bank’s fight with inflation. Forecasts for next year’s rate cuts are being pushed a bit further out given this less dovish messaging compared to the Federal Reserve last night but roughly a 1% cut in UK rates by the end of next year remains the expectation.

The European Central Bank (ECB) held rates at 4.00% today at today’s governing council meeting, finishing off the trifecta of central bank holds this week. They downgraded growth projections for 2023 and 2024 by 0.1% and 0.2% respectively, to 0.6% and 0.8%, but perhaps more importantly they downgraded inflation expectations to 2.7% next year (from 3.2% previously) and see inflation getting to the 2.0% target the year after. This obviously raises the likelihood of rate cuts coming earlier than previously expected. If growth is slowing and inflation is moderating as they expect, cuts in headline rates would be an obvious move and the markets continue to price in 150 bps of cuts by the end of next year. Timing of course is key to the start of this pivot and while March is the nailed-on date in the rates markets, this may well be a tad premature – the ECB has a habit of moving more slowly and cautiously than some might hope.