The Bank of England (BoE) opted to keep interest rates steady at 5 percent in its latest monetary review. The decision by the Bank’s Monetary Policy Committee (MPC) saw an 8-1 vote, with only one member favoring a rate cut to 4.75 percent.
Bank of England Governor Andrew Bailey defended the decision to maintain the current rate, emphasizing the importance of keeping inflation low. He suggested that it was crucial to keep inflation under control, which required caution in cutting rates too quickly or drastically.
As a result, the British pound surged to 1.33 against the U.S. dollar, reaching levels not seen since early March 2022, following the Russian invasion of Ukraine. Sterling also gained ground against the euro, reaching two-year highs. The EUR/GBP exchange rate dipped below 0.84, poised to close at its lowest point since August 2022.
The 2-year gilt yield held steady at 3.90 percent, now offering 30 basis points more than the corresponding 2-year U.S. Treasury yield and 165 basis points more than the 2-year German Schatz yield. U.K. interest rate futures now suggest a 66 percent probability of a Bank of England rate cut in November, a decrease from previously fully pricing in a cut before the recent decision.
Inflation data and future expectations
This decision followed the release of the U.K.’s latest inflation data, which held steady at 2.2 percent for the year ending in August, despite a noticeable increase in flight costs. The BoE expects annual inflation to rise to approximately 2.5 percent by year-end as the effects of last year’s energy price declines diminish in the yearly comparison.
Read more: BoE faces pressure as U.K. inflation nudges higher to 2.2 percent in July on energy cost
MPC’s majority vote and bond reduction plan
The decision to maintain the policy rate was strongly supported, with eight members voting in favor, while the sole dissenting voice, Swati Dhingra, called for a 25 basis point reduction. The Committee also unanimously agreed to reduce the stock of U.K. government bond purchases held for monetary policy purposes by £100 billion ($93.77 billion) over the next 12 months, lowering the total to £558 billion ($523.58 billion).
Response to market pressure and future outlook
In August, the BoE had reduced rates by 25 basis points as annual inflation dropped to 2 percent in July. Despite facing pressure from the Federal Reserve’s aggressive 50 basis point rate cut a day prior, U.K. policymakers chose to keep rates unchanged, citing the “absence of material developments.”
Looking ahead, U.K. policymakers underscored that future decisions would be made on a meeting-by-meeting basis.
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