Skip to main content
Market Update

BoE holds rates steady again while ECB pauses record run of hikes

November 2, 2023


The Bank of England (BoE) kept rates on hold at 5.25% for a second consecutive meeting today, as it attempts to balance a weakening economy with inflation that is still measuring three times its target. The Bank's updated forecasts show medium-term inflation slightly higher than in August's report, and it warned that the risks to inflation projections are still skewed to the upside.

The European Central Bank (ECB) also kept interest rates on hold at a record high last month, following 10 consecutive rate hikes — stating that the latest data continues to point to inflation gradually coming down to its 2.00% target. The deposit and refinancing rates have increased 450 basis points since July last year to 4.00% and 4.50% respectively. The decision was widely expected following September's hike, and disappointing economic data suggests the jump in borrowing costs over the past 15 months are weighing more heavily on economic activity.

Bank of England

The Bank of England’s Monetary Policy Committee (MPC) voted six-to-three to keep rates on hold, with three members voting for a 25-basis-points hike.

However, with U.K. inflation persistently exceeding the Bank’s forecasts, rising further than most other developed economies and now proving slower to come back down, the BoE was keen to retain a slightly hawkish stance. The Bank warned monetary policy would need to stay tight for “an extended period of time”, with BoE Governor Bailey stating that the MPC would be monitoring the situation “closely” to see if further hikes are required.

While the Bank is forecasting growth to flatline over the next year, it is less certain about the labour market, which has outperformed relative to the sluggish economic performance over the past 18 months. The imbalance of job vacancies to available workers has supported wage demands that saw pay growth hit a record of 7.90% in August — and is forecasted to gradually slow, potentially keeping inflation higher due to increased input costs. This is one reason why the BoE has reiterated that it expects to have to keep rates at higher levels over the coming months.

U.K. two-year swap rates fell by ~10 basis points immediately after the decision to 4.80%, while market pricing from overnight index swaps show investors are pricing in the first rate cut in the second half of 2024 — later than both the ECB and the Federal Reserve. The market also expects the BoE to cut rates at a slower pace than its European and U.S. counterparts, something the MPC seems quite comfortable with.

European Central Bank

The ECB meeting gave very little away regarding future policy changes, though President Lagarde did seek to enforce the "higher for longer" principle more than at the September meeting. This was likely in response to the market interpreting the Bank’s last decision as being the final hike, before it begins cutting rates in the first half of next year. Lagarde said that suggestions of rate cuts were far too premature and that these were not part of the Bank’s discussions.

Investors continue to expect the ECB to cut rates in the second quarter of next year. Following the ECB’s meeting, two-year EUR swap rates fell 20 basis points to 3.30%, the lowest since June. This suggests that markets expect the deterioration in the economy and the disinflation trend to continue, allowing the Central Bank to reduce borrowing costs and stimulate growth.

The latest economic data showed the eurozone economy contracting 0.10% in the three months to September, meaning GDP has expanded by just 0.10% over the past 12 months. Meanwhile, the latest October data showed activity growth contracting at a faster pace, with Germany a particular weak spot, as the steep fall in manufacturing starts to feed through to the services sector. The ECB’s latest quarterly bank lending survey also points to a weaker growth path, as banks tightened lending standards and demand for loans from businesses and consumers is weaker than expected.

Moving forward

Having been strongly criticised over its communication early on in the rate-hiking cycle, pushing back against market expectations of a peak in borrowing costs of just 2.00%, the BoE is treading carefully. While further rate hikes seem less likely with inflation gradually slowing, Governor Bailey's says it is "much too early to be thinking about rate cuts."

The ECB sounded less optimistic in its growth outlook than in previous meetings with President Lagarde stating, “the economy should strengthen over the coming years" — which sharply contrasts the September view that GDP growth would return to its potential growth rate as early as the first quarter of next year. Barring a major rebound in the eurozone economy or an unexpected pickup in inflation, "higher for longer" may turn out to be more transitory than inflation has.

Expert Conversation with Matt Henry and Rob Kaplan

Matt Henry, Chatham's Managing Partner and CEO, and Rob Kaplan, former President and CEO of the Federal Reserve Bank of Dallas, discuss critical issues affecting the capital markets and the global economy.


Chatham Hedging Advisors, LLC (CHA) is a subsidiary of Chatham Financial Corp. and provides hedge advisory, accounting and execution services related to swap transactions in the United States. CHA is registered with the Commodity Futures Trading Commission (CFTC) as a commodity trading advisor and is a member of the National Futures Association (NFA); however, neither the CFTC nor the NFA have passed upon the merits of participating in any advisory services offered by CHA. For further information, please visit

Transactions in over-the-counter derivatives (or “swaps”) have significant risks, including, but not limited to, substantial risk of loss. You should consult your own business, legal, tax and accounting advisers with respect to proposed swap transaction and you should refrain from entering into any swap transaction unless you have fully understood the terms and risks of the transaction, including the extent of your potential risk of loss. This material has been prepared by a sales or trading employee or agent of Chatham Hedging Advisors and could be deemed a solicitation for entering into a derivatives transaction. This material is not a research report prepared by Chatham Hedging Advisors. If you are not an experienced user of the derivatives markets, capable of making independent trading decisions, then you should not rely solely on this communication in making trading decisions. All rights reserved.