LONDON (Reuters) – The Bank of England kept interest rates at 5.0% on Thursday, saying it would be careful about future cuts, and also held off from running down its bond holdings at a faster pace, avoiding extra budget strains for finance minister Rachel Reeves. The Monetary Policy Committee voted 8-1 to keep rates on hold. Only external member Swati Dhingra voted for a further quarter-point rate cut after the BoE last month delivered its first reduction to borrowing costs since 2020.
Economists polled by Reuters had forecast a 7-2 vote for a hold after last month’s tight 5-4 decision to cut rates from their previous 16-year high.
Sterling briefly jumped above $1.33 to its highest since March 2022, and investors scaled back bets on further Bank Rate cuts.
On Wednesday, the U.S. Federal Reserve cut rates by a larger than expected 0.5 percentage points, reflecting the Fed’s confidence that inflation pressures are cooling.
BoE Governor Andrew Bailey struck a more cautious tone as wage growth looked set to remain too high for comfort and policymakers remained divided over how fast long-term inflation pressures were fading.
“It’s vital that inflation stays low, so we need to be careful not to cut too fast or by too much,” he said.
Investors think the BoE will cut rates at a somewhat slower rate than the Fed.
“Clearly, the Bank’s relative caution stands in some contrast to the Fed’s strong start to its easing cycle,” said Luke Bartholomew, Deputy Chief Economist at fund manager abrdn.
“Underlying inflation pressures in the UK remain elevated, while the labour market is sending quite mixed messages about the health of the economy,” he added.
The BoE said inflation was likely to rise to around 2.5% by the year’s end from 2.2% in the most recent data, moving further away from its 2% target but by less than a previous forecast for an increase to around 2.75%. Lower oil prices contributed to the change.
BoE staff also estimated that unemployment had probably risen more in recent quarters than suggested by official data, which has suffered from very low response rates.
After Thursday’s announcement, investors no longer fully priced two rate cuts by the end of 2024, as they had done earlier in the day, and they expected the BoE to cut rates in quarter-point steps four or five more times by June.
By contrast, they see around seven such cuts in the U.S.
QT CONTINUES
The MPC voted 9-0 to maintain the pace of its programme for reducing its stockpile of British government bonds purchased in past attempts to stimulate the economy.
The 100 billion-pound pace of quantitative tightening over the coming 12 months will be the same as over the past year, in line with most market expectations.
Some investors had predicted an acceleration of QT, as the BoE holds 87 billion pounds of gilts that are due to mature naturally over the next year, leaving just 13 billion pounds for active gilt sales at the current pace.
Lawmakers and think tanks have criticised QT because it brings forward losses sustained by the BoE, which purchased gilts in past years at much higher prices than their current sale value. Those losses are underwritten by the taxpayer.
The BoE also makes losses from paying interest on the reserves it issued to finance the purchases of gilts, which now far outstrips the returns generated by the bonds.
Many economists think finance minister Rachel Reeves will change Britain’s fiscal rules to exclude the impact from QT in her inaugural budget on Oct. 30 – something that could give her several billion pounds of extra fiscal space.
James Sproule, UK chief economist at Swedish bank Handelsbanken, said the lower level of active sales compared with the previous year would help Reeves as it would reduce compensation due to the BoE.
($1 = 0.7515 pounds)
Source: Economy - investing.com
