On Thursday (September 19), the Bank of England made no changes today, choosing to keep the policy rate unchanged at 5.00% and stabilize the pace of balance sheet reduction at 100 billion pounds per year; this is consistent with our and the vast majority of the economy. Economists’ predictions are consistent (even after the Federal Reserve cut interest rates sharply). There were no major changes to the central bank’s policy statement, adhering to a limited approach to forward guidance, and its interpretation of economic conditions was generally a lackluster update on recent developments. We expect the Bank of England to cut interest rates by 25 basis points at the November and December meetings, followed by 125 basis points throughout 2025, roughly once a quarter to 3.25%.
A combination of no rate cut (contrary to the market’s marginal bets), a slightly hawkish 8-1 vote split, no real agreement on a rate cut in November, and no changes to balance sheet reduction plans has kept gilts flat and sterling It only strengthened briefly. The market is keenly watching possible changes in the pace of the Bank of England’s “QT”, as the larger debt reduction target is likely to involve larger sales of gilts (rather than passive rolls). If so, it could lead to a more balanced performance between short-term and long-term gilt yield curves.
At the time of writing (8:15 ET), 2-year gilt yields were up 6 basis points and 10-year gilt yields were up 4 basis points – note that during this period, the U.S. 2-year Treasury yields were essentially flat, with the 10-year Treasury yield rising 2 basis points. The November meeting was priced at around 27 basis points of implicit rate cuts, with December totaling 43 basis points, representing a 7 basis point reduction from 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 act more cautiously. Sterling briefly rose but is still hovering around the 1.33 level on the back of a pre-announced 0.6% gain for the day.
In short, “in the absence of substantial progress, the gradual removal of policy restrictions remains appropriate,” according to the statement. Since the Bank of England cut interest rates by 25 basis points on August 1, the evolution of the two CPI and two employment/wage reports (among other reports) has been relatively consistent with the forecasts of the monetary policy report released last month. Service sector inflation was slightly lower than expected, but not significantly, “remaining at a high of 5.6% in August”, while wage growth after bonuses in June and July remained at a high of 5.4% and 5.1% respectively. UK GDP unexpectedly did not grow in July, but this was not enough to offset the positive momentum for a better-than-expected UK economy in 2024.
After a sharply divided 5-4 vote in the August resolution – notably with chief economist Pill leaning towards no change – the bar for successive rate cuts is high today, with the Bank of England The MPR last month stated that they “must be careful not to cut interest rates too much or too quickly”, and Governor Bailey repeated this to the BBC today. Our interpretation of the August decision is that the Bank of England will conduct a quarterly review when the MPR is released, similar to the ECB (the ECB’s October rate cut is consistent with the new round of forecasts).
Today’s 8-1 vote may be more hawkish than some expected, with Deputy Governor Ramsden thought to be likely to vote alongside dovish leader Dhingra. It’s not surprising that the latter voted for more easing today (she has been hoping for a rate cut since February), so in a way this morning’s decision was a very strong consensus. We won’t read too much into the November announcement from this split vote. By then we should have stronger evidence that upward pressures on inflation (such as significant overshoots in wages and GDP growth) have not yet materialized and that policy needs to be less restrictive to avoid the BoE facing excessive inflation at well below trend growth. Low risk.
