The Bank of England made no changes today, choosing to keep its policy rate unchanged at 5.00% and to keep the pace of balance sheet reduction steady at £100bn per year; this is in line with our forecasts and those of the vast majority of economists (even after the Fed’s aggressive rate cuts). There were no major changes to the central bank’s policy statement, sticking with its limited forward guidance approach, and the reading on economic conditions was generally a bland update on recent developments. We expect the Bank of England to cut rates by 25bps at each of its November and December meetings, followed by 125bps of cuts throughout 2025, roughly quarterly to 3.25%.
The combination of no rate cut (contrary to the market’s marginal bets), a slightly hawkish 8-1 split vote with no real agreement on a November rate cut, and no change to the balance sheet reduction plan, has kept gilts flat and GBP only briefly stronger. Markets are keenly watching for possible changes to the BoE’s “QT” pace, as it is possible that a larger debt reduction target would involve larger-scale gilt sales (rather than passive rolls). If so, it could lead to a more balanced performance between the short and long term gilt yield curve.
At the time of writing (8:15 ET), 2-year UK gilt yields were up 6bps and 10-year UK gilt yields were up 4bps – note that during this period, US 2-year yields were essentially flat and 10-year yields were up 2bps. The November meeting is priced in around a 27bps implied rate cut, totaling 43bps by December, representing a 7bps reduction in the priced-in rate cut. We think this is a bit too much to reduce rate cut bets, but may reflect the market’s view that the Bank of England will proceed more cautiously. GBP briefly rose but is currently hovering around the 1.33 level due to the pre-announced 0.6% gain on the day.
In short, according to the statement, “in the absence of substantive progress, a gradual removal of policy constraints remains appropriate”. Since the BoE’s 25 basis point rate cut on August 1, the evolution of the two CPI and two employment/wage reports (among others) has been relatively consistent with the forecasts of the Monetary Policy Report released last month. Services inflation was slightly lower than expected, but not significantly, and “remained high at 5.6% in August”, while wage growth excluding bonuses remained high at 5.4% and 5.1% in June and July respectively. UK GDP unexpectedly did not grow in July, but this was not enough to offset the positive momentum of the UK economy being better than expected in 2024.
The August decision was a closely split 5-4 vote – notably with Chief Economist Pill leaning towards no change – the bar for a back-to-back rate cut is high today, with the BoE’s MPR last month noting that they “must be careful not to cut too much or too fast”, a line repeated by Governor Bailey to the BBC today. Our reading of the August decision is that the BoE will review quarterly as the MPR is published, similar to the ECB (whose October rate cut coincided with a new round of forecasts).
Today’s 8-1 vote was perhaps more hawkish than some had expected, as Deputy Governor Ramsden was thought likely to vote with dovish leader Dhingra. The latter’s vote for more easing today was not surprising (she had been wanting a rate cut since February), so in a way this morning’s decision was a very strong consensus. We would not read too much into the November announcement from this split vote. By then we should have stronger evidence that upward pressures on inflation (e.g. a big overshoot in wage and GDP growth) have not materialised and that policy needs to be eased lest the Bank of England runs the risk of running too low inflation with well below trend growth.
