In addition to reiterating its commitment to exercise caution in future rate reductions, the Bank of England refrained from rapidly decreasing its bond holdings on Thursday, so sparing Finance Minister Rachel Reeves’ budget further pressure. The bank kept interest rates at 5.0%.
Rates were held in place by an 8-1 majority in the Monetary Policy Committee. 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.A 7-2 vote in favor of a hold was predicted by Reuters pollsters following the close 5-4 vote last month to lower rates from their 16-year peak.
For a brief while, investors reduced their wagers on additional rate cuts as sterling surged above $1.33, its highest level since March 2022.
The U.S. Federal Reserve reduced rates by 0.5 percentage points on Wednesday, a bigger decrease than anticipated, indicating the Fed’s belief that inflation pressures are abating.BoE Governor Andrew Bailey adopted a more circumspect stance as policymakers disagreed over the rate at which longer-term inflation pressures were abating and wage growth appeared certain to stay too high for comfort.
He stated, “We need to be careful not to cut too fast or by too much since it is crucial that inflation stays low.”
Later, Bailey expressed his “optimism” to broadcasters, saying that although the BoE required further proof of decreasing price pressures, rates will still drop.
Investors anticipate a slower rate reduction from the BoE than from the Fed.
According to Luke Bartholomew, Deputy Chief Economist at investment manager abrdn, “underlying inflation pressures in the UK remain elevated, but the labour market is delivering very contradictory signs about the health of the economy.”
The Bank of England (BoE) predicted that inflation would rise to roughly 2.5% by year-end from 2.2% in the latest statistics. This is less than the rate of 2.75 percent that it had predicted last month. Reduced oil costs were a factor in the shift.
The MPC determined that the labor market was still tight overall, but BoE officials also concluded that unemployment had likely increased more in recent quarters than shown by official data, which has suffered from extremely low response rates.
Following the decision on Thursday, investors revised their expectations for the BoE’s rate cuts, anticipating four or five more quarter-point cuts by June, instead of fully pricing in two rate cuts by the end of 2024. In comparison, there are about seven similar cuts in the United States.QT CONTINUES
The MPC decided to match the reduction it made over the previous 12 months by reducing its holdings of government bonds by an additional 100 billion pounds between October 2024 and September 2025. This decision was made unanimously.
Under its quantitative easing program, the Bank of England purchased 875 billion pounds of gilts between 2009 and 2022 in an effort to boost the economy. This will be lowered to 558 billion pounds under the recently announced quantitative tightening (QT) round.
Given that the BoE owns 87 billion pounds’ worth of gilts that are set to mature gradually over the course of the next year, some investors had anticipated an acceleration of QT.
