On the heels of yesterday's exuberant 50bps rate-cut by The Fed, Bank of England (BoE) officials (in a split decision) decided to leave the Bank Rate at 5.00% (as widely expected).
The split of the vote (8-1), however, was somewhat more hawkish than many expected with only one MPC member (Dhingra) voting for a cut.
While the MPC stuck to its meeting by meeting approach (saying "[It] will decide the appropriate degree of monetary policy restrictiveness at each meeting"), it added a new sentence saying "in the absence of material developments, a gradual approach to removing policy restraint remains appropriate", indicating that it is not keen to cut too fast or by too much.
At this month’s decision, BoE policymakers slightly downgraded their outlook for the UK economy.
They now expect growth at 0.3% in the third quarter, slightly lower than the 0.4% forecast in August.
Laura Cooper, global investment strategist at Nuveen, said the BOE would likely catch up with the US through next year. UK growth looks sluggish and the Labour government is expected to raise taxes and cut public spending at its Oct. 30 budget, which she said could warrant a more aggressive easing cycle.
“As focus turns to the fiscal backdrop and the upcoming October budget, the Bank of England’s reluctance to follow major peers in a swifter cutting cycle will be challenged,” Cooper said.
The set statement also ended with a hawkish tone, that policy will need to remain sufficiently restrictive for sufficiently long until the risks to inflation returning sustainably to 2% have dissipated further.
Finally, we note that The BoE announced it would maintain the pace of QT (allowing £100 bn to run off its Asset Purchase Facility in the coming year against £100 bn in the year just ended).
The BOE’s quantitative tightening plan implies “a much smaller amount of active gilt sales,” said Jessica Hinds, a director in Fitch Ratings’ economics team (we estimate active sales decline from around £50 bn to £13 bn).
“While bank reserves are currently well above estimates of minimum required levels, today’s announcement suggests that the MPC wants to keep the path of total reduction predictable given the large amount of gilts maturing over the next 12 months.”
The more hawkish tone overall sent cable higher, with the pound reaching its strongest against the dollar since March 2022...
Cable has picked up some more impetus in the last six weeks or so since the respective meetings of central banks, and the growing conviction in markets about the rate paths of the two diverging.
“Everything here says it’s likely to be a gradual quarterly pace of rate cuts at best,” said Jordan Rochester, head of macro strategy at Mizuho International.
Gilts slipped and money markets pared wagers on the extent of BOE interest-rate cuts this year, with 42 basis points of easing seen through December compared with 50 basis points before the decision (a November rate-cut is still fully priced-in for the BoE and a follow-up December cut is trading around a 65% chance).
