Bank of England governor ‘optimistic’ that interest rates can be cut, after ‘no change’ decision today – as it happened
Newsflash: The Bank of England has left UK interest rates on hold,At its latest meeting, the Bank’s Monetary Policy Committee voted to leave interest rates at 5%, resisting any temptation to cut rates for the second meeting running,The vote means no fresh relief for borrowers (even as defaults on direct debits rise), a day after the US central bank cut its rates for the first time in four years,The decision comes a day after UK inflation stuck at 2,2% in August, above the Bank’s 2% target, with a rise in both core inflation and services inflation.
More to follow…Time to wrap up…,The Bank of England has kept interest rates unchanged at 5% as it put its efforts to ease the pressure on household budgets on hold,The Bank’s monetary policy committee (MPC) voted by a majority of eight to one against launching a back-to-back reduction in borrowing costs amid concerns over lingering inflationary pressures,The Bank last month cut interest rates for the first time since the Covid pandemic was declared four years ago, after a sharp fall in inflation from a peak of more than 11% in late 2022 – the highest level since the early 1980s,Andrew Bailey, the Bank’s governor, said inflationary pressures had continued to ease, but cautioned against expectations for rapid interest rate cuts, saying:“The economy has been evolving broadly as we expected.
If that continues, we should be able to reduce rates gradually over time.But it’s vital that inflation stays low, so we need to be careful not to cut too fast or by too much.”Bailey later told broadcasters that he was “optimistic” that inflation pressures would ease enough to allow further cuts to interest rates.He said:We’re now on a gradual path down.That’s the good news.
I think interest rates are going to come down.I’m optimistic on that front, but we do need to see some more evidence.And of course, we’ll be looking at this at every meeting.City economists predicted the Bank would cut interest rates in November, and make perhaps four quarter-point cuts to rates in 2025.Here’s the full story:By leaving UK interest rates on hold today, the Bank of England has fallen behind several fellow major central banks.
At 5%, UK interest rates are just 25 basis points (a quarter of one percentage point) below their highest level reached in the tightening cycle which ran over the last few years,In contrast, the US Federal Reserve has just cut its rates by 50 basis points,The European Central Bank has made two quarter-point cuts this year, meaning its deposit rate is now 50 basis points off its recent peak,The Swiss National Bank has also made two 25bp cuts in 2024,Adrien Pichoud, chief economist at Bank Syz, says that difference has strengthened the pound:Importantly, as the Fed embarks on a policy of monetary easing and the ECB also cuts its key rates, the spread between sterling and other major currencies supports sterling, which reached its highest level in two years against the dollar and the euro after today’s announcement.
The strength of the currency will help to bring down inflation by containing pressure on imported goods and services.Sterling’s strength is also a headwind for exporters, which will ultimately weigh on the outlook for economic growth.The minutes of the Bank of England’s interest-rate-setting meeting this month cites three possible scenarios that could hit the economy.The first – that global shocks unwind – could allow interest rates to be cut faster, whie the third – that wage and prices rises are stickier than expected – could mean higher borrowing costs for longer.The Bank says:In the first case, the unwinding of the global shocks that drove up inflation and the resulting fall in headline inflation should continue to feed through to weaker pay and price-setting dynamics.
The persistence of inflationary pressures would therefore dissipate with a less restrictive stance of monetary policy than in other cases.In the second case, a period of economic slack, in which GDP falls below potential and the labour market eases further, may be required in order for pay and price-setting dynamics to normalise fully.Domestic inflationary persistence would then be expected to fade away, owing to the opening up of slack from a more restrictive stance of monetary policy relative to the first case.In the third case, the economy may be subject to structural shifts such as changes in wage and price-setting following the major supply shocks experienced over recent years.The degree of restrictiveness of monetary policy may be less than embodied in the Committee’s latest assessment, meaning that monetary policy would have to remain tighter for longer.
Japanese bank MUFG tells clients the Bank of England might squeeze in two interest rate cuts later this year:BoE leaves policy rate on hold following 25bp cut in August.The 8-1 vote was not a surprise with Swati Dhingra the lone dissenter and Alan Taylor voting for the first time with the majority.We see a cut in November and an increased chance of another in December.The pound remains the top G10 currency performer year-to-date but we see scope for that outperformance to start to fade.Looking ahead, Deutsche Bank predicts the Bank of England will make one more interest rate cut by the end of this year, lowering Bank Rate from 5% to 4.
75%.Thereafter, they predict four quarter-point rate cuts through 2025, followed by a further three more rate cuts in 2026, taking Bank Rate down to 3%.The big news today is the more unified message from the Bank of England’s policymakers that “a slow and steady removal of policy restraint” is needed.So explains Sanjay Raja, chief UK economist at Deutsche Bank.In a research note titled The Importance of Being Idle, Raja points to three key points:First, the decision to hold Bank Rate was not unanimous.
While we expected a more divided MPC, today’s decision highlighted a less divided Committee, with the vote tally coming in at 8-1,Second, the MPC struck a more cautious tone than we expected,But the door remains wide open for a Q4 rate cut,Indeed, for the majority of the MPC, “a gradual approach to removing policy restraint would be warranted”,And third, the Bank left its quantitative tightening (QT) envelope fixed at £100bn.
What does this signal? By maintaining a steady QT envelope, the MPC has implicitly signalled that the Bank puts more weight on the total stock of gilt reduction as opposed to the Bank’s active sales footprint.Total sales for the next 12 months now will total £13bn, lowering the impact on cash borrowing for the remainder of the current fiscal year and the next fiscal year (i.e.2025/26).Gabriella Dickens, G7 economist at AXA Investment Managers, predicts the Bank of England will cut rates at its next meeting, in November, to 4.
75%,And looking further ahead, Dickens predicts the Bank will make one quarterly rate cut per quarter in 2025, which would bring Bank Rate down to 3,75% by the end of next year,She told clients:We think a further 25 basis point (bp) cut in November is in keeping with the messaging that a “gradual pace” of tightening seems appropriate,Further ahead, we think the risks are skewed to the downside.
Yes, services Consumer Price Index (CPI) inflation and wage growth are higher in the UK than in its peers, but we look for a material slowdown over the next 12 months,And tighter-than-expected fiscal policy following the October 30th Budget looks very possible given recent signals from the government,For now, we maintain a quarterly pace of tightening this year and throughout 2025, leaving Bank Rate at 4,75% end-2024 and 3,75% end-2025.
But the risks are to the downside, primarily associated with expected fiscal tightening.Stocks on Wall Street have hit a new record high, as investors welcome last night’s whopping cut in US interest rates.The S&P 500 share index has jumped by 1.5%, gaining up to 88 points to 5705.96 points.
Fawad Razaqzada, market analyst at City Index and FOREX.com, says the half-point cut in US interest rates last night has cheered markets:The move was seen as a bold but necessary step to ease economic concerns without sending panic signals reminiscent of the 2008 financial crisis.Fed Chair Jerome Powell emphasised that the cuts are not part of a long-term strategy but rather a proactive measure aimed at stabilising growth, now that inflation appears to be on the path of returning to its target.The Dot Plot projection also boosted investor confidence, showing a possible 50 basis points of cuts this year and 100 next year, with the terminal rate expected to hit 3.0% by 2026.
Bank of England governor Andrew Bailey has told broadcasters he is “optimistic” that inflation pressures would ease enough to allow further cuts to interest rates,Speaking to the BBC after UK interest rates were left on hold at 5% today, Bailey says the Bank’s job is to make sure inflation is “sustainably” at the 2% target [it was 2,2% in August],He says:We’ve made a lot of progress, inflation’s come down a long way, and of course we were able to cut rates in August,Bailey adds that there are still some inflationary pressures, pointing out that price rises in the services sector are still running at an “elevated” rate (services inflation jumped to 5.
6% in August, from 5.2%)But, Bailey says, interest rates are on a ‘gradual path’ downwards:We’re now on a gradual path down.That’s the good news.I think interest rates are going to come down.I’m optimistic on that front, but we do need to see some more evidence.
And of course, we’ll be looking at this at every meeting.NEW: 🚨 BoE Governor Andrew Bailey to broadcasters:“Interest rates are going come down, I’m optimistic on that front but we do need to see some more evidence…”He says it’s “imperative to raise the potential growth rate” of the economy” … and re fiscal rule change…:🚨 Asked if he would see anything wrong with HMT changing the fiscal rule target (to include BoE), Governor Bailey:“doesn’t really affect at all what we do… And so it's an important decision for them… I’m very relaxed that Treasury will take right decision on that front”⚠ BOE'S BAILEY: **OPTIMISTIC UK INTEREST RATES WILL FALL FURTHER, NEED MORE EVIDENCE**NEED TO SEE RESIDUAL INFLATION PRESSURES DISAPPEAR**"IMPERATIVE" THAT UK IMPROVES ITS CURRENT POTENTIAL GROWTH OF 1.2%-1.3%**"VERY RELAXED" THAT UK GOVERNMENT WILL TAKE RIGHT DECISION…Although the Bank was cautious today, it could speed up its interest rate cuts next year if it grows more confident that inflationary pressures are easing.ING developed markets economist, James Smith, predict that this will allow the Bank to lower rates to 3.
25% by next summer, from 5% today.That would be the lowest since November 2022.Smith says:“The Bank’s hawks worry that corporate price and wage-setting behaviour has permanently shifted in a way that’s going to make it perpetually harder to get inflation down on a sustained basis.We’re not convinced that’s the consensus view on the committee right now – August’s decision to cut rates certainly suggests it isn’t.But so long as wage growth and services inflation remain sticky, then the committee as a whole seems happy to tread carefully.
We’re less convinced that the UK’s easing cycle will deviate that much from the Fed or others.As the Bank readily concedes, the recent stickiness in service sector inflation is mostly down to volatile categories that hold little relevance for monetary policy decisions.Strip that out, and the picture is slowly looking better.“Meanwhile, the jobs data, though admittedly of dubious quality right now, points to an ongoing cooldown too.The number of payrolled employees appears to be falling now and that will inevitably feed through to wage growth.
Companies are consistently lowering their estimates of expected and realised price/wage growth, according to a monthly BoE survey,We therefore think that Bank of England rate cuts will accelerate after November,Beyond then, we think the Bank will grow more confident in the persistence of inflation and there will be sufficient consensus on the committee to switch to back-to-back rate cuts,Like investors, we expect a cut in November and December, with further cuts in 2025 taking us to 3,25% by the end of next summer.
”At 5%, UK interest rates now ranks as the highest among major economies, my colleague Phillip Inman points out.But the economy is far from overheating, he writes:Economic growth remains stagnant and employment is well down from its pre-pandemic level.Businesses are not investing and consumer confidence, which rose earlier in the year, has stalled.According to these measures, interest rates should be on the way down and at a much faster pace.The MPC, or at least most of its nine members, says this analysis ignores important dynamics in the post-pandemic economy that are inflationary.
It believes the jobs market remains stuck in a groove of ever higher wages that have yet to be choked off by high interest rates,While the employment rate is down, this has not translated into unemployment going up by much,Instead, workers have bailed out of the labour market altogether,Some have joined the ranks of the long-term unemployed,These are working-age people who, in a previous era, were able to retrain and find a new job.
Others have been signed off sick,Others have taken early retirement,Without a thriving jobs market and a confident business sector keen to invest, the Bank judges growth will remain low and the economy unable to expand by much next year and the year after without being inflationary,The odds of a cut to UK interest rates in November, at the Bank of England’s next meeting, have now risen to 80% according to the money markets,That’s up from 60% shortly after the Bank’s announcement at noon today