By Andy Bruce and David Milliken
On Thursday, the Bank of England decided to maintain interest rates at 5.0% and announced its intention to decrease its stock of British government bonds by an additional 100 billion pounds over the next 12 months. This move is expected to have an impact on the government's finances.
The Monetary Policy Committee voted 8-1 to keep rates steady, with only external member Swati Dhingra advocating for a further quarter-point rate cut. Last month, the BoE had lowered borrowing costs for the first time since 2020.
Economists surveyed by Multibagger had predicted a vote of 7-2 in favor of maintaining rates, following last month's narrow decision to reduce rates from their previous 16-year high.
Meanwhile, the U.S. Federal Reserve made a larger-than-expected cut of 0.5 percentage points to interest rates on Wednesday, reflecting their belief that inflation pressures were easing.
Despite this, the BoE struck a more cautious tone on Thursday. Governor Andrew Bailey mentioned that while cooling inflation should allow for gradual rate cuts in the future, it's crucial to ensure that inflation remains low and not to cut rates too quickly or excessively.
Investors anticipate that the BoE will reduce rates at a slower pace than the Fed in the next year due to the persistent inflation pressures in the UK. The annual consumer price inflation is projected to reach around 2.5% by the end of the year, compared to the previous estimate of 2.75%, partly due to lower oil prices.
Before the latest decision, investors had priced in approximately five quarter-point rate cuts by June 2025, similar to the expectations for the European Central Bank. On the other hand, they foresee around seven rate cuts in the U.S., even after the recent significant reduction.
Analysis:
The Bank of England's decision to keep interest rates steady and reduce its bond holdings will have various implications for the economy. By maintaining rates, the BoE aims to balance the need for stimulating economic growth while keeping inflation in check. The gradual reduction of bond holdings indicates a cautious approach to tightening monetary policy, which could impact borrowing costs and government finances. Investors should closely monitor these developments to make informed decisions about their investments and financial strategies.