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

LONDON – The Bank of England said on Thursday it would keep interest rates on hold after its initial cut in August, even after the U.S. Federal Reserve opted to cut rates dramatically the previous day.

The Monetary Policy Committee voted 8-1 to keep interest rates on hold, with the dissenting member voting for a further 0.25 percentage point cut.

The committee said a “gradual approach” to monetary easing remained appropriate, with service sector inflation remaining “elevated.” The committee added that the British economy, which has returned to growth but has been slow this year, is expected to return to a base rate of around 0.3% in the second quarter.

The Bank of England was weighing a mixed bag of data when deciding on interest rates, with headline inflation consistently close to its 2% target but price increases in the services sector – which accounts for around 80% of the UK economy – rising to 5.6% in August. UK wage growth slowed to its lowest in more than two years in the three months to July, but remained relatively high at 5.1%.

The British pound was supported by both announcements, trading 0.72% higher against the US dollar at $1.3306 at 12:10 p.m. London time on Thursday. That was its highest level since March 2022, according to data from the London Stock Exchange.

Meanwhile, global stock markets rose on Thursday, with the pan-European STOXX 600 index up 1.4%.

Traders are also awaiting the Bank of England’s annual announcement on Thursday on the pace of quantitative tightening. The central bank voted to reduce its stock of bonds — known as government bonds — by £100 billion ($133 billion) over the next 12 months through active sales and bond maturities.

The amount was in line with the previous period, contrary to some expectations that the program would be accelerated. The Bank of England’s balance sheet ballooned during the pandemic as it sought to boost the economy, before reversing course and starting the quantitative easing program in February 2022.

The Bank of England is now losing money on its taxpayer-backed quantitative easing programme because bonds are being sold at lower prices than they were bought at. However, Bank of England Governor Andrew Bailey argues that the central bank needs to do QE now to free up space for more QE or other operations in the future.

The Bank of England confirmed its expectations of keeping interest rates on hold even after the US Federal Reserve decided on Wednesday. The European Central Bank kicked off the current cycle of rate cuts with a 50 basis point cut. Many strategists had expected a smaller 25 basis point cut at the September meeting, though market pricing this week suggests a greater than 50% chance of the more aggressive option.

The MPC decision is likely to be made around midday on Wednesday, before the Fed announcement, but central bankers around the world will now be assessing what the move means for global economic growth and financial conditions.

The Bank of England delivered a “more decisive and hawkish vote than expected” with the vote split 8-1, supporting government bond yields and lifting sterling, said Kyle Chapman, foreign exchange analyst at Ballinger Group.

“This decision is cautious and reflects the fact that the Bank of England is not as fortunate as the Fed on inflation… However, this meeting looks like a prelude to a rate cut in November, and then a sustained quarterly pace thereafter.”

Meanwhile, global stock markets rose on Thursday, with the pan-European STOXX 600 index up 1.35%.

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

Frederic Ducrozet, head of macroeconomic research at Pictet Wealth Management, said of QE that the Bank of England was “caught between a rock and a hard place, because of the choices it made in the past,” and that it was the only central bank in the world to record this kind of loss.

The UK’s new Labour government is due to deliver its first budget in October. Ducrozet told CNBC’s “Street Signs Europe” shortly before the decision was made that extending the active and passive tax cuts into next year would create “problems for fiscal policy, at least it wouldn’t make the government’s job any easier.”

“Or you don’t, and then you look like you’re not really independent of the government, and you incur more losses and you have to manage that over time,” he said.