Key Points:
- The Bank of England’s Monetary Policy Committee voted 8-1 to hold rates, with one member dissenting in favor of a 0.25 percentage point cut.
- Kyle Chapman, a foreign exchange analyst at Ballinger Group, noted the vote was “more decisive and more hawkish than expected.”
- The central bank also voted to reduce its bond holdings by £100 billion ($133 billion) over the next year.
The Bank of England (BOE) has opted to hold interest rates steady, following an earlier cut in August. Despite expectations of further easing, the Monetary Policy Committee (MPC) voted 8-1 to pause, with one dissenting vote for a 0.25 percentage point reduction.
Citing a “gradual approach” to monetary easing, the committee highlighted ongoing elevated services inflation and modest economic growth, expecting the economy to stabilize at around 0.3% growth per quarter in the second half of the year.
Inflation and Market Reactions
The decision comes as the BOE navigates mixed economic signals. Headline inflation has stayed near the 2% target, but services inflation rose to 5.6% in August, affecting about 80% of the U.K. economy. Wage growth, although cooling, remains relatively high at 5.1%.
The British pound strengthened following the BOE’s announcement, climbing 0.72% against the U.S. dollar to $1.3306, the highest since March 2022. Global equity markets also rallied, with the Stoxx 600 index rising 1.45%.
Fed Influence
The BOE’s decision to hold rates came even after the U.S. Federal Reserve launched its own rate cuts with a 50-basis-point reduction the previous day. While many strategists had expected a smaller 25-basis-point cut, the Fed’s move surprised markets, which had been pricing in more than a 50% chance of a larger cut throughout the week.
Fed Chair Jerome Powell said during a news conference that the central bank aimed to “restore price stability without the kind of painful increase in unemployment that has come sometimes with this inflation.” Recent labor market data from the U.S. had raised concerns about the extent of the slowdown in the world’s largest economy.
The BOE’s decision was likely finalized around midday on Wednesday, ahead of the Fed’s announcement, but central bankers worldwide will now assess what the Fed’s action means for global economic growth and financial conditions.
Kyle Chapman, a foreign exchange analyst at Ballinger Group, noted that the BOE delivered a “more decisive and more hawkish vote than expected” with its 8-1 split, which supported gilt yields and boosted the pound.
“This is a cautious decision that reflects the fact that the Bank of England is simply not in as fortunate a position as the Federal Reserve with regards to inflation,” Chapman said. “That said, this meeting feels more like a precursor to a rate cut in November and possibly a continued quarterly pace thereafter.”
The BOE previously lowered its key interest rate to 5% from 5.25% in August, in a close 5-4 vote, and was expected to maintain that rate until its next meeting in November.
Deutsche Bank’s chief U.K. economist, Sanjay Raja, reiterated his expectation of one more rate cut this year, which would bring the bank rate down to 4.75%, followed by four quarter-point reductions through 2025. “We see risks skewed toward a faster dial-down of restrictive policy in the near term,” Raja added.
Frederik Ducrozet, head of macroeconomic research at Pictet Wealth Management, commented on the QT program, noting that the Bank of England is “stuck between a rock and a hard place, and that’s because of the choices they made in the past.” He pointed out that the BOE is the only central bank in the world recording these kinds of losses.
Ducrozet also warned that extending QT into next year could complicate fiscal policy for the U.K.’s new Labour government, which is set to deliver its first budget in October. He said on CNBC’s “Street Signs Europe” that keeping QT at its current pace provides somewhat of a “middle ground.”
