Policymakers also voted to reduce the pace at which the BOE is reducing its government bond holdings
[LONDON] The Bank of England held interest rates at 4 per cent and left the prospect of more cuts later this year in doubt after growing concerns over a resurgence in inflation.
The Monetary Policy Committee voted 7 to 2 in favour of keeping rates unchanged on Thursday (Sep 18), with long-standing doves Swati Dhingra and Alan Taylor backing another quarter-point cut. The decision and vote split were expected by economists.
It kept guidance warning that future cuts will be “gradual and careful” and “depend on the extent to which underlying disinflationary pressures continue to ease.” Upside risks to “medium-term inflationary pressures remained prominent in the Committee’s assessment,” it said.
UK bonds edged higher after the announcement, with the yield on 10-year gilts slipping one basis point to 4.62 per cent. The pound held onto earlier gains, up 0.1 per cent at US$1.364.
“Although we expect inflation to return to our 2 per cent target, we are not out of the woods yet,” governor Andrew Bailey said in a statement alongside the decision.
The bank said there had been more progress in seeing easing wage pressures than prices, but noted a recent uptick in inflation could put more pressure on both.
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The BOE’s language reinforces the more cautious tone since the last meeting in August that has prompted traders to scale back bets on future cuts. It came after official data this week showed inflation at almost double the BOE’s 2 per cent target and signs that the jobs market is stabilising.
Policymakers also voted to reduce the pace at which the BOE is reducing its government bond holdings after volatility in the gilt market drove long-term borrowing costs to their highest in almost 30 years. From October, the balance sheet will shrink by £70 billion (S$122 billion) a year from the current pace of £100 billion, while active sales will be skewed away from long-end gilts.
The UK stands in contrast with the US Federal Reserve, which cut rates on Wednesday and is expected to follow up with several more. Traders expect the UK central bank to ditch its once-a-quarter easing pace, with only one more move fully priced in by the end of 2026 ahead of Thursday’s decision.
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It comes amid deep divisions at the BOE over how to tackle a fresh spike in inflation fuelled by energy and food bills. Household inflation expectations are now rising, and some officials worry this could trigger a feedback loop by fuelling wage demands that then lead to more price increases.
The BOE expects inflation to hit 4 per cent this month, a reading that is due to be released around two weeks before the MPC holds its November meeting. Officials are particularly worried about the spiralling cost of food, given its salience for consumers.
They have previously pointed to a cooling labour market and subdued economy as evidence of easing price pressures coming down the track. However, recent data has suggested the jobs market is stabilising following the blow inflicted by Chancellor of the Exchequer Rachel Reeves hiking employer payroll taxes and the minimum wage in April.
Economic growth has also been better than feared, with the UK outpacing other Group of Seven nations in the first half. The BOE now expects GDP growth of 0.4 per cent in the third quarter, from 0.3 per cent previously. BLOOMBERG
