The Bank of England (BoE) opted to hold interest rates steady at 5% today after inflation remained persistent, following an initial 25 basis point cut last month.
Consumer price inflation (CPI) was 2.2% in August and the BoE expects it to increase to 2.5% towards the end of 2024, as last year’s energy price declines fall out of the annual comparison. Services inflation remained elevated at 5.6% last month.
The monetary policy committee (MPC) said its “decisions have been guided by the need to squeeze persistent inflationary pressures out of the system so as to return CPI to the 2% target both in a timely manner and on a lasting basis.”
Today’s announcement puts the UK on a slower path than the European Central Bank, which has reduced rates twice, and the US Federal Reserve’s mammoth 50bps cut yesterday. This divergence could ricochet into the currency markets, strengthening the pound versus the dollar and the euro, said Daniele Antonucci, chief investment officer at Quintet Private Bank.
“With a stronger currency, imported inflation is likely to slow more quickly and given less competitive exports, this might slow economic growth too. If that happens, consumer inflation might slow more rapidly than expected,” he said.
“This is one of the reasons why we expect the Bank of England to re-join other central banks and lower rates once again later this year.”
The MPC also voted to reduce the stock of UK government bond purchases (financed by the issuance of central bank reserves) by £100bn over the next 12 months to £558bn.
Jamie Niven, a senior portfolio manager at Candriam, said the “maintenance of £100bn of asset purchase run off” is “somewhat positive versus expectations” and “could help to support the longer end of the gilt curve”.