Bank of England keeps interest rates on hold, British pound rises to highest in more than two years

LONDON — The Bank of England said on Thursday it would leave interest rates unchanged after its first cut in August, even after the U.S. Federal Reserve opted for a major rate cut the day before.

The Monetary Policy Committee voted 8-1 to maintain, while the dissenting member voted for a cut of 0.25 percentage points.

A “gradual approach” to monetary easing remained appropriate, with “elevated” services sector inflation, the committee said. The UK economy, which has returned to growth but has been sluggish this year, is expected to return to an underlying pace of around 0.3% per quarter in the second half, it added.

The British pound strengthened on both announcements, rising 0.72% against the US dollar to $1.3306 at 12:10 a.m. London time on Thursday, the highest rate since March 2022, according to LSEG data.

Meanwhile, global stock markets rose on Thursday, with the pan-European Stoxx 600 index rising 1.35%.

Also being closely watched on Thursday is the BOE’s annual announcement on the pace of quantitative tightening (QT). The central bank voted to reduce its stock of bonds – known as gilts – by £100 billion ($133 billion) over the next 12 months through active sales and bond redemptions.

That amount was in line with the previous period, despite expectations by some that the program would be accelerated.

The BOE is losing money on its taxpayer-subsidized QT program because in the past they were bought at higher prices than they are now being sold for. However, BOE Governor Andrew Bailey argues that it needs to do QT now to have room to do more quantitative easing or other operations in the future.

The committee assessed a mixed bag of data, with headline inflation consistently close to the 2% target, but price increases in services – which account for around 80% of the UK economy – rising to 5.6% in August. UK wage growth cooled to a more than two-year low in the three months to July, but remained relatively strong at 5.1%.

The BOE reaffirmed expectations for a hold-even after the U.S. Federal Reserve initiated its own rate cuts in the current cycle with a 50 basis point cut on Wednesday. Many strategists had expected a smaller 25 basis point cut at its September meeting, despite market prices through this week pointing to a more than 50% probability of the more aggressive option.

Fed Chairman Jerome Powell told a news conference that the central bank is “trying to create a situation where we restore price stability without the painful increase in unemployment that sometimes accompanies this inflation.” Recent U.S. labor market data has raised concerns about the extent of the slowdown in the world's largest economy.

The British pound was strengthened by the Fed news, rising 0.5% against the US dollar to $1.327 at 11:15 a.m. London time on Thursday. Global stock markets rallied meanwhile, with the pan-European Stoxx-600 index 1.34% higher.

The Bank of England cut its key interest rate to 5% from 5.25% in August by a narrow 5-4 majority, and had been expected to keep rates at that level until its next meeting in November.

Frederik Ducrozet, head of macroeconomic research at Pictet Wealth Management, said of the QT programme that the Bank of England was “between a rock and a hard place and that was because of the choices they made in the past” and because it was the only central bank in the world to suffer these kinds of losses.

The UK's new Labour government is due to present its first budget in October. Extending passive and active QT into next year “will create problems for fiscal policy, but it certainly won't make the government's job any easier,” Ducrozet told DailyExpertNews's “Street Signs Europe” shortly before the decision.

“Or you don't do it, and then it looks like you're not really independent of the government. You suffer more losses and you have to deal with that over time,” he said.