(Bloomberg) -- The Bank of England warned investors it won’t rush to ease monetary policy, deciding against a second consecutive cut in borrowing costs as it awaits further signs inflationary pressures have subsided.
The BOE’s Monetary Policy Committee voted 8-1 to keep rates steady at 5%, an outcome whose caution contrasts with the half-point reduction delivered in the US on the eve of the UK announcement on Thursday. While the decision was in line with the expectations of economists and investors, it pushed the pound to its strongest level against the dollar since March 2022.
“We should be able to reduce rates gradually over time,” Governor Andrew Bailey said in a statement, stressing that such a path would depend on price pressures continuing to ease. “It’s vital that inflation stays low, so we need to be careful not to cut too fast or by too much.”
The BOE’s wary tone on the prospect of future loosening may dampen expectations in markets for the central bank to shift to quicker easing in borrowing costs later this year. Ahead of the meeting, investors had ramped up bets on successive moves from November, though policymakers didn’t explicitly endorse a change at their next gathering.
Money markets pared wagers on the extent of interest rate cuts this year, with 42 basis points of easing seen through December compared to 50 basis points before the decision. Gilts slipped, sending the 10-year benchmark yield four basis points higher to 3.89%, while the two-year yield was two basis points higher at 3.92%.
“The decision to keep base rates on hold aligns with our long-held view that the bank will take a cautious approach to the start of the cutting cycle,” said Dean Turner, chief European economist at UBS Global Wealth Management. “Taken together with an economy showing few signs of stress, policymakers have time on their hands.” He expects a second rate cut in November.
The BOE’s decision on how to reverse 14 back-to-back hikes arrives in the wake of the Federal Reserve’s 50 basis-point salvo on Wednesday. Officials in London didn’t know the result of the meeting in Washington when they reached their own judgment.
The vote shows that recent data featuring slower-than-expected inflation and the UK economy’s recovery fizzling out has yet to convince officials that the threat from consumer prices has been sufficiently contained. Swati Dhingra, the committee’s most dovish member, was the sole voice backing an immediate quarter-point reduction.
In a broadcast interview, Bailey repeated his steady-as-we-go message, saying that “elevated” inflation in the services sector continued to pose a risk.
“I think we’re now on a gradual path down. That’s the good news. I think interest rates are going to come down. I’m optimistic on that front, but we do need to see some more evidence,” he said. “We need to see that sort of residual element now fully taken out” to keep inflation “sustainably” at the 2% target.
The MPC also maintained the £100 billion ($132 billion) a year pace of its balance sheet run-off, in a unanimous decision on quantitative tightening. That means the amount of active gilt sales by the central bank will plunge to around £13 billion in the 12 months from October, down from the current pace of £50 billion.
The outcome was in line with market and economists’ expectations. Officials said there’s a “high bar” to tweaking the planned shrinking in its stock of gilts in the interim.
New Guidance
The BOE reduced rates for the first time in over four years last month in a tight 5-4 vote, with Chief Economist Huw Pill in the hawkish ranks opposing a move. However, the policy guidance in Thursday’s minutes added language that warned investors that officials will take their time in reversing the most aggressive tightening in decades.
“In the absence of material developments, a gradual approach to removing policy restraint remains appropriate,” the minutes said. The guidance reiterated their preference for a meeting-by-meeting approach and the need for policy to remain “restrictive for sufficiently long.”
The vow for a patient stance comes despite recent data suggesting that the threat from consumer prices is fading. Data on Wednesday showed inflation held at 2.2% in August, staying below the BOE’s forecast for 2.4%, though services inflation was uncomfortably high at 5.6%. Wage growth has continued to gradually ease and the economy has cooled, with gross domestic product stagnating in three out of the last four months.
The BOE said that it now expects output growth to slow to 0.3% in the third quarter, slightly weaker than the 0.4% predicted in its August forecasts. Inflation is anticipated to pick up to 2.5% by the end of the year, slightly lower than the 2.8% previously projected.
The UK decision is just one moving part in a pivotal week for central banks. Aside from the Fed rate cut, Brazilian officials raised borrowing costs for the first time since 2022, while Norwegian officials signaled no intention to ease until 2025.
Later on Thursday, South African policymakers may deliver a reduction, and on Friday, the Bank of Japan will deliver its first rate judgment since its hike at the end of July sowed the seeds of a global selloff.
--With assistance from Andrew Atkinson, Irina Anghel and Greg Ritchie.
(Adds comments by Bailey, updates markets)
©2024 Bloomberg L.P.