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 hold rates, 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 inflation in the services sector remaining “elevated.” The committee added that the British economy, which has emerged from recession but has grown only slowly this year, is expected to return to a base rate of around 0.3% growth 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 rises in services – which account 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 pound was up 0.72% against the US dollar at $1.3306 at 12:10 p.m. London time on Thursday. This was the highest rate 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 1.45%.

The Bank of England’s annual announcement on the pace of quantitative tightening, or QT, was also closely watched on Thursday. The central bank voted to reduce its stock of British government bonds — known as gilts — 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 losing money on its taxpayer-backed quantitative easing programme because bonds are being sold at lower prices than they were bought at. However, BoE Governor Andrew Bailey has argued 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 reiterated its expectation that interest rates will remain on hold even after the US Federal Reserve on Wednesday began cutting rates in the current cycle by cutting them by 50 basis points. Many strategists had expected a smaller 25 basis point cut at the September meeting, although market pricing this week suggests a greater than 50% chance of an aggressive option.

Federal Reserve Chairman Jerome Powell said at a news conference that the central bank is “trying to get to a situation where we get back to price stability without the painful increase in unemployment that has sometimes come with this inflation.” Recent U.S. labor market data has raised concerns about the extent of the slowdown in the world’s largest economy.

The MPC decision is likely to be made around midday on Wednesday, before the Fed's 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 cautious decision reflects the fact that the Bank of England is not in the same fortunate position 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.”

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 there until its next meeting in November.

Deutsche Bank’s chief UK economist, Sanjay Raja, reiterated the case for another rate cut this year, taking the bank rate to 4.75%, followed by four quarter-point cuts through 2025. “We see risks to accelerating the pace of tightening in the near term,” Raja added.

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.”

He added that keeping the quantitative easing rate unchanged, which the Bank of England has chosen, provides a kind of “middle ground”.