LONDON, Sept 19 (Askume) – The Bank of England kept interest rates unchanged at 5.0% on Thursday, saying it was cautious about cutting interest rates in the future and refrained from significantly reducing its bond holdings to avoid additional budget burdens, Finance Minister Rachel Reeves.
The Monetary Policy Committee voted 8 to 1 in favour of keeping interest rates unchanged. Only external member Swati Dhingra voted for another quarter-point rate cut after the Bank of England cut borrowing costs for the first time since 2020 last month.
Economists polled by Askume had expected a 7-2 vote to avert a rate hike, after a tight 5-4 decision to cut rates to a 16-year high last month.
The pound briefly climbed above $1.33, to its highest level since March 2022, as investors reduced bets on further interest rate cuts.
On Wednesday, the Federal Reserve cut interest rates by a more-than-expected 0.5 percentage point , reflecting the Fed’s belief that inflation pressures are easing.
Bank of England Governor Andrew Bailey has taken a more cautious stance as wage growth remains well above comfortable levels and policymakers are divided over how quickly long-term inflation pressures will ease.
“It’s very important to keep inflation low, so we have to be careful not to cut rates too quickly or too much,” he said.
Bailey later told the broadcaster he was ” optimistic ” that interest rates would fall further, but first the BoE needed more evidence that price pressures had eased.
Investors believe the Bank of England will cut interest rates at a slower pace than the Federal Reserve.
Luke Bartholomew, deputy chief economist at fund manager Aberdeen, said: “Inflation pressures in the UK remain high and the labour market is sending very mixed messages about the health of the economy.”
The Bank of England said inflation will rise to 2.5% by the end of this year, down from 2.2% in the latest data and lower than last month’s forecast of about 2.75%. Low oil prices prompted the change.
Bank of England staff also estimate that the unemployment rate in recent quarters may have been higher than the level shown by official data, but the response rate for official data is very low, but the Monetary Policy Committee estimates that the labor market remains generally tight.
After Thursday’s announcement, investors no longer expect two interest rate cuts by the end of 2024, but expect the Bank of England to cut interest rates four to five more times by June, by 25 basis points each time. By comparison, they see about seven such cuts in the United States.
Continue Qt
The Monetary Policy Committee voted unanimously to reduce its government bond holdings due between October 2024 and September 2025 by 100 billion pounds, in line with cuts over the past 12 months.
The Bank of England bought £875 billion of gilts between 2009 and 2022 as part of its quantitative easing programme to boost the economy. A newly announced round of quantitative tightening (QT) will reduce this figure to £558 billion.
Some investors expect QT to rise because the Bank of England has £87 billion of government bonds due to mature naturally next year, leaving only £13 billion for active government bond sales at the current pace.
Lawmakers and think tanks have criticized QT because it exposes the losses the Bank of England, which in previous years has bought British gilts at prices well above their current selling prices, has to bear on the back of taxpayers.
The Bank of England also loses money on interest payments on the reserves it releases from its purchase of British gilts. With bank interest rates at 5%, the interest now paid is far greater than the return generated by the bonds.
Many economists expect Finance Secretary Rachel Reeves to change the UK’s fiscal rules to exclude the effect of QT in her first budget on 30 October – which could give her billions of pounds of extra fiscal space.
Bailey said he was not worried about this and that fiscal considerations would not influence the Bank of England’s quantitative easing decision.
James Sproul, chief UK economist at Handelsbanken, said the lower level of active selling compared with last year would help Reeves as it would reduce Bank of England compensation.
($1 = 0.7515 British pounds)
