Financial institution of England pauses rate of interest cuts and emphasizes “gradual method”

Commuters cycle past the Bank of England (BOE) in the City of London, United Kingdom, on Monday, September 16, 2024 (left). The release of the central bank's Monetary Policy Committee interest rate decision is scheduled for September 19.

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LONDON — The Bank of England said on Thursday that it would leave interest rates unchanged after its first cut in August, even though the U.S. Federal Reserve decided to cut its benchmark rate significantly the day before.

The Monetary Policy Committee voted 8 to 1 to maintain the key interest rate, while the dissenting member voted for a further reduction of 0.25 percentage points.

A “gradual approach” to monetary easing remains appropriate as services sector inflation remains “elevated,” the committee said. The UK economy, which has emerged from recession but has seen sluggish growth this year, is expected to return to underlying growth of around 0.3 percent per quarter in the second half of the year, it added.

The MPC evaluated mixed data in its interest rate decision. While overall inflation remained steady near the 2% target, price increases in the services sector – which accounts for around 80% of the UK economy – rose slightly to 5.6% in August. Wage growth in the UK cooled in the three months to July to a level that was low for more than two years, but remained relatively high at 5.1%.

The British pound was boosted by the BOE and Fed announcements and was trading 0.72% higher against the US dollar at $1.3306 at 12:10 p.m. London time on Thursday, the highest since March 2022, according to LSEG data.

Meanwhile, global stock markets recovered on Thursday, with the pan-European Stoxx 600 index rising 1.45 percent.

Also closely watched on Thursday was the BOE's annual announcement on the pace of quantitative tightening (QT). The central bank decided to reduce its holdings of British government bonds – known as gilts – by £100 billion ($133 billion) over the next 12 months through active bond sales and maturities.

This amount was the same as the previous period, contrary to expectations by some to accelerate the program. The BOE's balance sheet swelled during the pandemic as it tried to stimulate the economy before changing course and starting QT in February 2022.

The BOE is losing money on its taxpayer-subsidized QT program because bonds are being sold at lower prices than they were bought for. But BOE Governor Andrew Bailey believes the central bank needs to conduct QT now to have room for more quantitative easing or other measures in the future.

Influence of the Fed

The BOE confirmed expectations for a hold even after the Federal Reserve initiated its own rate cuts in the current cycle with a 50 basis point cut on Wednesday. Many strategists had expected a smaller 25 basis point cut at the September meeting, although market prices this week suggested a probability of over 50% for the aggressive option.

Fed Chairman Jerome Powell said at a press conference that the central bank was trying to “achieve a situation where we restore price stability without the painful rise in unemployment that sometimes accompanies inflation.” Recent US labor market data had raised concerns about the extent of the slowdown in the world's largest economy.

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

Kyle Chapman, a foreign exchange analyst at the Ballinger Group, said the BOE had cast a “more decisive and aggressive vote than expected” by an 8-1 margin, supporting UK government bond yields and boosting the pound.

“This is a cautious decision, reflecting the fact that the Bank of England is simply not in as fortunate a position as the Federal Reserve when it comes to inflation. … Yet this meeting reads more like a build-up to a rate cut in November and a subsequent quarterly pace.”

The Bank of England cut its base rate from 5.25% to 5% in August in a narrow 5-4 vote and was widely expected to keep the rate at that level until its next meeting in November.

Sanjay Raja, Deutsche Bank's chief UK economist, reiterated his call for a further rate cut this year to 4.75 percent, followed by four cuts of a quarter of a percentage point each by 2025. “We see the risk that restrictive policy will be scaled back more quickly in the short term,” Raja added.

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British Pound/US Dollar

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

The new Labour government in Great Britain is due to present its first budget in October. The extension of passive and active QT into next year will “create problems for fiscal policy, at least it will not make the government's job any easier,” Ducrozet told CNBC's “Street Signs Europe” shortly before the decision.

Leaving the QT rate unchanged, as the BOE had decided, offers something of a “middle ground,” he added.