Bank of England pauses rate cuts, stresses ‘gradual approach’

LONDON — The Bank of England said Thursday it would keep interest rates steady following its initial cut in August, even after the U.S. Federal Reserve opted for a massive rate cut the day before.

The Monetary Policy Committee voted 8 to 1 to maintain monetary policy, with the dissenting member voting for another 0.25 percentage point reduction.

The committee said a “gradual approach” to monetary easing remained appropriate as service sector inflation remained “elevated.” The U.K. economy, which has emerged from recession but has seen slow growth this year, is expected to return to an underlying pace of growth of around 0.3% per quarter in the second half of the year, it added.

The Monetary Policy Committee (MPC) assessed a mixed bag of data in making its rate decision: headline inflation remained consistently close to its 2% target, but price rises in services (which account for around 80% of the UK economy) rose to 5.6% in August. UK wage growth cooled to a more than two-year low in the three months to July, but remained relatively high at 5.1%.

The British pound was boosted by announcements from the Bank of England and the Federal Reserve, and was trading 0.72% higher against the US dollar at $1.3306 as of 12:10 p.m. London time on Thursday. That was the highest exchange rate since March 2022, according to LSEG data.

Meanwhile, global stock markets rose on Thursday, with the pan-European Stoxx 600 index up 1.45%.

Also closely watched on Thursday was the BOE’s annual announcement on the pace of quantitative tightening, or QT. The central bank voted to reduce its stock of British government bonds – known as gilts – by 100 billion pounds ($133 billion) over the next 12 months through active sales and maturing bonds.

That amount was in line with the previous period, contrary to expectations among some for an acceleration of the program. The BOE’s balance sheet swelled during the pandemic as it sought to boost the economy, before reversing course and beginning the period of quantitative easing in February 2022.

The BOE is suffering losses on its taxpayer-subsidized QT program because bonds are being sold at lower prices than they were purchased for. However, BOE Governor Andrew Bailey argues that the central bank needs to implement QT now to have room to undertake more quantitative easing or other operations in the future.

The Bank of England confirmed its expectations to hold interest rates even after the U.S. Federal Reserve on Wednesday kicked off its own rate cuts in the current cycle with a 50 basis point reduction. Many strategists had expected a smaller 25 basis point cut at the September meeting, even though market pricing this week pointed to a more than 50% chance of the hawkish option.

Federal Reserve Chairman Jerome Powell told a news conference that the central bank was “trying to get to a situation where we restore price stability without the kind of painful rise in unemployment that has sometimes accompanied this inflation.” Recent U.S. labor market data had raised concerns about the extent of the slowdown in the world’s largest economy.

The MPC’s decision was likely made around midday on Wednesday, before the Fed’s announcement, but central bankers around the world will now assess what the move means for global economic growth and financial conditions.

Kyle Chapman, currency analyst at Ballinger Group, said the BOE had cast a “more decisive and aggressive vote than expected” with an 8-1 split, supporting government bond yields and lifting the pound.

“It’s a cautious decision that reflects the fact that the Bank of England is simply not in as fortunate a position as the Federal Reserve when it comes to inflation… That said, this meeting reads more like preparation for a cut in November, and a continued quarterly pace thereafter.”

The Bank of England cut its key rate to 5% from 5.25% in August in a narrow 5-4 vote, and was widely expected to keep it there until its next meeting in November.

Deutsche Bank’s chief UK economist Sanjay Raja reiterated his call for a further rate cut this year, taking the bank rate to 4.75%, followed by four quarter-point reductions through 2025. “We see risks to a faster reduction in policy tightening in the near term,” Raja added.

Frederik Ducrozet, head of macroeconomic research at Pictet Wealth Management, said of the QT programme that the Bank of England was “between a rock and a hard place and that is because of the decisions it has taken in the past” and that it was the only central bank in the world to be recording such losses.

The new UK Labour government is due to present its first budget in October. Extending the period of passive and active quantitative easing until next year will create “problems for fiscal policy, at least it doesn’t make the government’s job easier,” Ducrozet said on CNBC’s “Street Signs Europe” programme shortly before the decision.

Keeping the QT rate unchanged, as the BOE opted to do, provides a sort of “middle ground,” he added.