The Bank of England (BoE) has decided to maintain interest rates at 5 percent following steady inflation in August. However, it signaled a potential decrease in borrowing costs as early as November. The Monetary Policy Committee (MPC) voted eight-to-one to hold rates, having previously reduced them by a quarter point in the prior month.
In an indication that another rate cut might occur in the next seven weeks, the BoE announced a “gradual” approach to policy easing, contingent on no significant economic changes. This decision led to a brief rise in the sterling to its strongest level against the dollar since March 2022, before it settled up 0.3 percent at $1.3251. Additionally, two-year gilt yields, sensitive to interest rates, increased to 3.94 percent, a rise of 0.03 percentage points.
BoE Governor Andrew Bailey noted that inflationary pressures were diminishing and the economy was progressing as expected. He emphasized the need for a careful approach to rate reductions to ensure inflation remains low.
The BoE’s decision followed the US Federal Reserve’s half-point rate cut and a second quarter-point reduction by the European Central Bank (ECB) this year. Despite the recent rate cut in August, the BoE remains cautious about lowering borrowing costs too quickly, focusing on eliminating persistent inflationary pressures.
Rob Wood, Chief UK Economist at Pantheon Macroeconomics, indicated the BoE is on a path towards a November rate cut, given the continued easing of underlying inflation pressures without urgent need.
UK inflation remained steady at 2.2 percent in August, significantly below the 2022 peak of over 11 percent and near the BoE’s 2 percent target. However, there has been a recent rise in services price inflation.
The MPC forecasted that inflation would increase to 2.5 percent towards the year-end, with the economy expected to grow at a modest quarterly pace of 0.3 percent in the latter half of the year. The minutes from the meeting reflected diverse views among MPC members on domestic inflationary pressures, with most anticipating the need for further gradual rate reductions.
Swati Dhingra, the sole dissenting MPC member, advocated for an immediate quarter-point reduction to 4.75 percent. The BoE decided not to alter the pace of quantitative tightening, maintaining its plan to reduce bond holdings by £100 billion in 2024-25.
Following a critical report by former Fed Chair Ben Bernanke, the BoE is considering alternative economic scenarios. The minutes outlined three possible future cases: a scenario where inflation decreases as global shocks diminish, a situation necessitating lower growth to reduce inflation, and a potential scenario where persistent inflation requires prolonged tight monetary policy.
