On Thursday, the Bank of England kept its base rate unchanged at 5.00%, in line with market expectations. The bank cut rates by 25 basis points in August. Most members of the Monetary Policy Committee believe that it is reasonable to gradually reduce interest rates. The Bank of England kept its base rate unchanged at 5% by 8 votes to 1, with no one voting for a rate hike. Bank of England Governor Bailey pointed out that caution is needed and interest rates should not be cut too quickly or too much.

The Bank of England said it would cut its treasury holdings by £100 billion over the next 12 months, the same as last year, and would continue to reduce its treasury holdings as evenly as possible across a variety of maturities. In the fourth quarter of 2024, the Bank of England will hold an auction of £800 million of short-term treasury bills, an auction of £750 million of medium-term treasury bills, and an auction of £600 million of long-term treasury bills.

Interest rate futures prices show that the Bank of England will cut interest rates by 42 basis points by the end of the year, compared with 52 basis points before the policy announcement. The market is pricing in a 66% probability of a rate cut by the Bank of England in November, and the market fully priced in a rate cut before the interest rate decision.

After the interest rate decision was announced, GBP/USD rose 30 points in the short term to 1.3313, reaching its highest level since March 2022.

The Bank of England said that wage and price trends have continued to normalize, and the labor market continues to be loose, but it is still tight by historical standards. Quantitative tightening is progressing smoothly and no evidence of damage to market functioning has been found. Staff forecasts that GDP will grow by 0.3% quarter-on-quarter in the third quarter (forecasted to be 0.4% in August), and the underlying growth rate in the second half of the year will be 0.3%.

The Bank of England expects inflation to rise to 2.5% by the end of the year (the August forecast was about 2.75%), and reiterated that monetary policy needs to remain tight for a long enough time until inflation risks subside. Bailey said that since the August meeting, inflation pressures have continued to ease and the overall economic performance has been in line with expectations.

Inflation in the UK has been gradually slowing this year, falling from 4% in January to 2.2% in August, up slightly from the lows of 2% in May and June. But last month's inflation rate was the same as in July as rising airfares offset falling fuel and restaurant prices. Inflation in the UK's services sector has remained high, which is one of the key concerns of the Bank of England's Monetary Policy Committee.

James Smith, UK economist at ING, said the continued decline in expected and actual wage and price growth in the UK in recent months, combined with a continued cooling in the job market, bodes well for further rate cuts ahead. "We think the broad consensus at the Bank of England will shift to support a faster pace of rate cuts throughout the winter," Smith said. "We expect a series of rate cuts from November onwards, taking the bank rate to 3.25% by next summer."

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Article forwarded from: Jinshi Data