Bank of England Pauses Rate Cuts, Shifts Focus to Bond Sales
An interest rate cut from the Bank of England next week seems unlikely, but investors are eagerly awaiting its September meeting for indications about future monetary policy decisions and the pace of its bond sales, which has sparked political debate.
In a recent poll of 65 economists by Reuters, all respondents forecasted that the BoE would maintain its Interest rates at 5.0% on Sept. 19, following a decrease from a 16-year high of 5.25% in August. Although wage growth has slowed as anticipated by the Monetary Policy Committee last month and the economy showed no growth in July, there are conflicting reports on price pressures.
Market expectations on Thursday reflected a 20% chance of an interest rate cut next week, with a 0.25 percentage point reduction fully priced for November. With wage growth and services Inflation remaining high in the UK, investors believe that the BoE will adjust its policy less aggressively than the U.S. Federal Reserve over the next year and similarly to the European Central bank, which has already reduced rates twice this year.
The Decision Maker Panel, a favored business survey of the MPC, revealed that wage growth expectations have stabilized, while data anticipated on Wednesday is expected to show Inflation exceeding the Central bank‘s 2% target. Nomura economists anticipate a hold at the upcoming meeting based on the MPC’s narrow 5-4 vote in August and positive business surveys.
Additionally, the BoE’s upcoming annual decision on the pace of its quantitative tightening (QT) program is highly anticipated by bond investors. The QT program involves a gradual reduction of the BoE’s holdings of British government bonds purchased in past attempts to stimulate the economy. Last year, the MPC decided to reduce its stock of gilts by 100 billion pounds through active sales and bond maturation.
Despite criticisms from lawmakers regarding the losses incurred by the BoE through the QT program, BoE Governor Andrew Bailey emphasized the necessity of QT to restore the Central bank‘s ability to stimulate the economy if needed. BoE is expected to maintain its QT program at 100 billion pounds annually, with the possibility of increasing it to 115-120 billion pounds.
Finance minister Rachel Reeves is closely monitoring the QT decision, with plans to adjust Britain’s fiscal rules to exclude the impact of BoE’s QT program in the upcoming budget. Reeves aims to increase fiscal headroom significantly with this change.
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Emma Collins, graduated in Financial Economics from the University of Chicago in the USA in 2016. She has since worked at an asset management firm in New York, where she specializes in investment strategies and portfolio management. Emma has a keen interest in financial analysis and has published several articles in renowned financial journals. Her work focuses on providing actionable insights to investors, and she is known for her forward-thinking approach to managing financial portfolios.