Bank of England Maintains 5% Interest Rate, Aligns with Expectations

The Bank ⁣of​ England has decided to keep the policy rate unchanged at ⁤5.00% and maintain the pace of balance sheet reduction at 100 billion pounds per year. This decision is consistent ‌with the predictions of the majority of ​economists, including our own forecast.

The central bank’s policy statement‍ did⁢ not⁤ reveal‍ any major changes, ⁢adhering to a limited approach ‌to forward guidance. The interpretation of economic conditions was ⁣generally a lackluster‌ update on recent developments. We expect the ⁣Bank of England to cut interest rates ​by 25 ⁢basis ⁢points at the November and December meetings, followed by 125‌ basis points throughout 2025, roughly once a quarter to ‍3.25%.

The market’s reaction ⁢to the decision was muted, with gilts remaining flat ⁢and sterling strengthening briefly. The market is closely watching ‌possible changes in ⁢the pace of the Bank of England’s quantitative tightening (QT), as the larger debt reduction target is likely to involve larger sales of gilts. If so, it ⁢could lead to a more balanced​ performance between short-term and long-term gilt yield curves.

At ⁣the time of writing, 2-year gilt yields‌ were up 6 basis points and 10-year‌ gilt yields were up 4‌ basis points. The November meeting was priced ⁤at around 27 ‌basis points of implicit rate⁣ cuts, with​ December totaling 43 basis points, representing a 7 basis point reduction from the priced-in rate cut.‌ We believe this is a bit too much to reduce rate cut bets, but may reflect the market’s view that the Bank ‍of England ⁢will act more cautiously.

The Bank of ⁤England’s statement emphasized that “in the absence of substantial progress,‍ the gradual removal of policy restrictions remains appropriate.” Since the last ‌interest rate cut ⁣on August ‌1, the evolution of the two CPI and two employment/wage reports has been relatively consistent with the forecasts of the monetary policy‌ report released last month.

Service industry inflation was slightly lower than expected, but not significantly, “remaining at a high of 5.6%⁤ in August”, ‍while wage growth after bonuses in June‍ and July remained at a‍ high of‍ 5.4% and 5.1%‌ respectively.‌ UK GDP unexpectedly did not grow in July, but this was not enough to offset the positive momentum ⁢for a better-than-expected UK economy in 2024.

The Bank of England’s decision was made with‍ an 8-1 vote, which‌ may⁢ be more hawkish than some expected. Deputy Governor Lumsden was thought to be likely to vote alongside dovish leader Dhingra. We won’t ‍read too much‍ into the ⁣November announcement from this split vote. By then ​we should have stronger evidence that upward pressures on inflation have not yet materialized and that policy needs to be loosened ‍to avoid the BoE facing excessive inflation at well below trend growth.