The Bank of England kept interest rates at 5.0% on Thursday, saying it would be cautious about making future rate cuts. The bank is also delaying the reduction of its bond holdings at a faster rate, to avoid additional pressure on Finance Minister Rachel Reeves' budget.
The Monetary Policy Committee (MPC) voted 8-1 to keep interest rates on hold. Only outside member Swati Dhingra voted for a rate cut of a quarter point after the Bank of England last month implemented its first reduction in borrowing costs since 2020.
Economists polled by Reuters had forecast a 7-2 vote to keep rates on hold after a close 5-4 decision last month to cut rates from a 16-year high.
Pound sterling briefly strengthened above $1.33, hitting its highest level since March 2022, and investors trimmed bets on further rate cuts by the Bank of England.
On Wednesday, the US Federal Reserve cut interest rates more than expected, by 0.5 percentage points, reflecting the Fed's confidence that inflationary pressures are easing.
The Governor of the Bank of England, Andrew Bailey, is taking a more cautious approach as wage growth appears to remain high, and policymakers are still divided over how quickly long-term inflationary pressures are easing.
"It is important that inflation remains low, so we need to be careful not to reduce rates too quickly or too much," he said.
Investors believe that the Bank of England will cut rates at a slower rate than the Fed.
The response from Luke Bartholomew, Deputy Chief Economist at fund manager abrdn was that “Underlying inflationary pressures in the UK remain high, while the labor market gives mixed signals about the health of the economy,”.
The Bank of England said inflation is expected to rise to around 2.5% by the end of the year from 2.2% in the latest data, moving further away from the 2% target, but less than previous forecasts which showed an increase to around 2.75%. The drop in oil prices contributed to this change.
Bank of England staff also estimated that unemployment may have risen more in the last quarter than official data, which was affected by a very low response rate.
After Thursday's announcement, investors no longer fully expect two rate cuts by the end of 2024, as previously projected, and they expect the Bank of England to cut rates in quarter-point steps another four or five times by June.
Many economists believe the Chancellor of the Exchequer, Rachel Reeves, will change Britain's fiscal rules to exclude the effects of QT in her first budget on October 30, something that could give her several billion pounds of additional fiscal space.
James Sproule, UK Chief Economist at Swedish bank Handelsbanken, said the lower level of active sales compared to the previous year would help Reeves as it would reduce the compensation payable to the Bank of England.
