LONDON, Sept 19 (Askume) – The Bank of England on Thursday kept interest rates unchanged at 5% and voted to cut British government bonds by 100 billion pounds ($132.86 billion) over the next 12 months, boosting the government’s fiscal position.
The Monetary Policy Committee voted 8-1 in favour of keeping rates on hold, with only external member Swati Dhingra voting for a 25 basis point cut, after the Bank of England last month cut its 2020 cost of borrowing.
Sterling hit its highest level since March 2022, slightly above $1.33, and was trading around $1.3266 before the decision. It was up about 0.3% against the euro at 83.95 pence. UK government bond yields rose, while London’s FTSE stock index (.FTSE) gave up gains and ended the day up about 0.9%.
notes:
Chris Arcari, head of capital markets at Hymans Robertson in Glasgow:
“Given high core and service sector inflation, we still expect the Bank of England to gradually cut interest rates. Looking ahead, the market is already assessing a reasonable range for interest rates after 2025 as up to 3.3%.” After all.
“On the one hand, core inflation remained unchanged at 2.2% year-on-year in August, while weak PMI output showed that price balance inflationary pressures have eased. But on the other hand, core inflation rose more than expected in August. Year-on-year growth accelerated to 3.6% in August from 3.3% in July, with a strong labor market supporting robust growth.
Laura Cooper, global investment strategist at Nuveen in London:
“The Bank of England is remaining patient, maintaining a cautious stance on future policy decisions, challenging the outlook of its US counterparts.”
“While attention will be on the fiscal backdrop and the upcoming October budget, the BOE’s reluctance to follow its major counterparts into deeper rate cuts will remain challenging.”
“Stubborn services inflation should ease as labour market weakness eases. A period of potential tax hikes and public spending cuts could herald a sharp tightening cycle as policymakers take into account fiscal implications in their November forecasts.” We are pleased with the UK’s duration. But reluctantly so.
Jamie Niven, senior portfolio manager at Candriam in London:
As expected, the Bank of England kept interest rates steady, but with a slightly skewed vote (only one vote in favor of a rate cut, while two votes against were largely in line with expectations), and insisted on a ‘gradual’ rate cut. We think this is very likely. We will discuss this in November and perhaps even a 25 basis point cut in December, but our greatest conviction is in the final rate of the rate cut cycle, which we think should be low, “especially relative to the values set for the dollar and euro terminal rates.”
“It’s also worth noting that there is still a £100 billion asset purchase deficit, meaning active sales will decline in the coming year, which is somewhat positive compared to expectations and we believe this could help support the gilt curve in the longer term.”.
Susannah Streeter, Head of Wealth & Markets, Hargreaves Lansdown, Bristol:
“Optimism remains that, although growth may be slowing, the recent painful era of high interest rates is still coming to an end, which will provide more relief to businesses and consumers struggling with high borrowing costs.
“London-listed stocks remain on the positive side of sentiment as they also got a boost from the Federal Reserve’s decision to cut interest rates for the first time in more than four years, by 50 basis points more than usual. They are bullish going forward.”
“The Fed’s current priority is to protect the health of the US economy rather than lowering its inflation target, which is reassuring for investors in FTSE 100-listed multinationals and even more encouraging for the world’s largest economy.”
Henry Cook, European economist, MUFG, London:
“We expect the hawks to poll slightly higher on the other side of the Atlantic, 8 to 1. Nominal wage growth remains troublesome compared to other easing cycles, and underlying inflation remains high, so it is difficult to agree on a sequential phase.
“On quantitative tightening, I think the Bank of England is happy to run quantitative tightening in the background. If it works, it works, there’s no need to change it.”
Dean Turner, chief European economist at UBS Global Wealth Management in London:
“We expect the next rate cut to come at the Bank of England meeting in November, with many new forecasts pointing to a modest fall in inflation and a budget confirming the new government’s efforts to tackle the UK’s fiscal deficit.” Will there be a rate cut next? “
“Additionally, we expect rate cuts to occur on a quarterly basis next year, although there is a growing risk that the central bank could increase the pace of rate cuts and reach one cut per meeting.”
“While the Bank of England has maintained interest rates, central banks around the world have cut policy rates as inflation pressures have eased. We believe investors should expect lower interest rates in the coming months. You need to prepare your portfolio
Lindsay James, investment strategist, Quilter Investors, London:
“Given the stable economy, a cut in interest rates would be particularly welcomed by consumers and businesses. The picture for the first half of 2024 is positive and encouraging, but dark clouds are looming once again, and as a result, the Bank of England” needs to cut interest rates.”
Chris Scicluna, Head of Economic Research and Capital Markets at the University of London:
“We might get a rate cut in November and then it will depend on whether they do it 25 basis points per meeting or whether they do it every quarter.”
“QT’s £100 billion announcement was in line with expectations, meaning central bank reserve levels should be close to the equilibrium level considered by the BoE.”
Rupert Watson, global head of macro and dynamic asset allocation at Mercer in London:
“The Bank of England has kept interest rates on hold given stable inflation data, which shows inflation is falling but remains above target.”
“Wage growth and inflation trends are moving in the right direction, so we think the UK economy is gradually getting back on track, which allows the Bank of England to keep raising rates – and cutting rates – over the next six years,” he says. 3.5% will help.
Francis Haque, UK Chief Economist, Stanford University, London:
“Today’s pause announcement was expected given Governor Bailey’s comments at the August meeting that ‘the central bank should not cut rates too quickly or too deeply.'”
“There was positive news on wage growth – which will determine whether inflation stays on target – with pay growth slowing in July, with private sector pay growth higher than the Bank of England’s third quarter inflation forecast of 4.7%. Weekly three quarter data showed the core inflation rate remained at 2.2%, but the services sector inflation rate increased by 0.4% month-on-month – although slightly lower than the 5.8% forecast by the bank in August. “All this suggests the pace of interest rate cuts will remain slow and steady.”
($1 = 0.7527 British pounds)
