Bank of England Maintains⁤ 5% Interest Rate, Aligns with Forecasts

The ‌Bank of England has ⁢decided to keep its policy rate unchanged at 5.00% ⁣and maintain the pace of balance sheet reduction at £100bn per year. This decision aligns with our forecasts and⁣ those of the majority of economists, despite the Federal Reserve’s recent aggressive ‌rate cuts.

The central bank’s policy statement did not introduce any significant changes, ‍sticking to its limited forward‌ guidance approach. ⁤The⁤ reading on economic conditions provided a general update on recent developments, without⁢ any major surprises.

We expect the Bank of England to cut rates by 25bps at each of its November and December​ meetings, followed by 125bps of cuts throughout 2025, roughly quarterly to 3.25%. This forecast is based on our analysis of the current economic conditions and ​the central bank’s policy stance.

Market Reaction

The combination ⁣of no rate cut, a slightly hawkish 8-1 split vote, and no change‌ to the balance sheet reduction plan has​ kept gilts flat ⁢and GBP only ‌briefly stronger. Markets are closely watching for possible changes to ⁢the BoE’s “QT” pace, as a ‍larger debt reduction ​target could ‌involve⁤ larger-scale gilt sales.

At the time of writing, 2-year UK ⁤gilt yields were‍ up 6bps and 10-year UK gilt yields were up 4bps. The November meeting‌ is⁤ priced in around a 27bps implied rate cut, totaling 43bps by December, representing a 7bps reduction in the priced-in rate cut.

Economic Conditions

According to⁤ the statement, “in the⁢ absence of substantive progress, a gradual ⁣removal of policy constraints remains appropriate”. Since the BoE’s 25 basis point 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.

Services inflation was slightly lower than ⁤expected, but not significantly, and “remained high‍ at 5.6% in August”, while wage growth excluding bonuses remained high at 5.4% and 5.1% in June and July respectively. UK GDP unexpectedly ​did not grow in July, but this​ was not enough to offset the positive momentum of ​the UK economy being better ⁤than expected in 2024.

Future Outlook

The August ⁢decision was a ​closely split 5-4 vote, with Chief Economist Pill leaning towards no‍ change. The bar for ​a back-to-back ‍rate cut is high today, with the BoE’s MPR last month noting that they “must be careful not to ‌cut too much or too fast”.

Today’s 8-1 vote was perhaps more hawkish than some had ‌expected,⁤ as Deputy Governor Ramsden ⁢was thought likely ‌to vote with the dovish leader, ⁣Dhingra. We would not 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 materialized‍ and⁣ that policy‍ needs⁤ to be eased lest the Bank of England runs the risk of⁣ running too​ low inflation with well⁤ below trend growth.