Proactive Investors – The Bank of England’s monetary policy committee left at their September meeting, stating that the pace of future cuts is likely to be gradual.
Markets are expecting two more rate cuts from Threadneedle Street by the end of the year, but some economists say just one, in November is most likely.
The pound hit $1.33 for the first time since February 2022 in the aftermath of the decision, as currency markets also factored in the half-a-percent rate cut by the US Federal Reserve overnight.
BoE’s gradual approach
Eight members of the committee voted to keep rates unchanged, with the one vote for a cut coming from external MPC member Swati Dhingra. This was a swing from the 5-4 vote to cut in the previous meeting.
The MPC also voted to continue quantitative tightening at pace of £100 billion a year.
Governor Andrew Bailey said most members of the MPC think the Bank should be able to cut rates “gradually over time”.
The statement from the MPC said that as well as voting 8-1 in favour of holding rates steady, the committee also voted unanimously to reduce the stock of UK government bond purchases held for monetary policy purposes.
The reduction will be by £100 billion over the next 12 months, which would reduce it to a total of £558 billion, which is the same as the pace over the past 12 months.
“In the absence of material developments, a gradual approach to removing policy restraint remains appropriate,” the BoE committee said in its decision statement.
“Monetary policy will need to continue to remain restrictive for sufficiently long until the risks to inflation returning sustainably to the 2% target in the medium term have dissipated further.”
It noted that since its previous meeting, oil prices fell back but CPI inflation was revealed to have remained at 2.2% in August, but is expected to increase to around 2.5% towards the end of this year – though this is due to the comparative period last year seeing lower energy prices.
Reaction
Economist Paul Dales at Capital Economics’s summary of the MPC decision is that the BoE “underlines that interest rates will be reduced gradually”.
Markets are expecting two more 25-basis-point cuts from the BoE this year, but Dales expects only one, at the next meeting in November.
He said the most important change in the statement from the committee was the new line about the gradual approach to cutting rates, which he said contrasted with the US Federal Reserve’s jumbo 50bps rate cut last night.
This is because the BoE “has yet to shift from worrying less about inflation and worrying more about weak activity”.
Rob Wood at Pantheon Macroeconomics said the decision “came with more hawkish guidance than expected” and he also forecasts just one more rate cut this year, in November, and three next year
He said the wording of the gradual approach for most members of the MPC “suggests a relatively high bar to cutting in consecutive monetary policy meetings, and to reducing Bank Rate by more than 25bp at a time”.
He thinks services inflation and wage growth matching their forecasts by the time of the November meeting will be enough for the MPC to cut.
“We expect the MPC to then cut rates again in February, rather than moving in back-to-back meetings as the market prices.”
Isaac Stell, an investment manager at Wealth Club, noted that the decision comes “despite falling inflation expectations and the Bank expecting slower economic growth in the second half of the year”.
With the Prime Minister having delivered a speech three weeks where he warned the country should brace itself for a period of “painful” fiscal tightening, Stell said consumers and businesses “may have been looking to the Bank for some light fiscal pain relief”.
As the upcoming budget did not feature much in the MPC minutes, he said “this does beg the question, are the Treasury and Bank on speaking terms? Perhaps this is a sign that the Budget may not be that painful after all.”
the personal finance landscape “remains dynamic in anticipation of further cuts to the base rate in the not-too-distant future”, says Myron Jobson, senior personal finance analyst at Interactive Investor.
“Those in the market for a mortgage, whether they are prospective buyers or homeowners approaching the end of their fixed-rate deal, will be encouraged by the flurry of mortgage rate reductions in recent weeks.
“With the Bank of England indicating that further rate cuts are likely before the year is up, many will be holding off until the last possible moment to secure the best deal.
