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The Bank of England's monetary policy committee decided to keep the interest rate unchanged at 5.0% during its September meeting, indicating that any future rate cuts are likely to be gradual.
The financial markets are anticipating two additional rate cuts by the end of the year, though some economists predict only one, possibly in November. Following the announcement, the pound reached $1.33, a level not seen since February 2022, partly influenced by the US Federal Reserve's recent half-percent rate cut.
Eight members of the committee voted to maintain the current rate, with only external member Swati Dhingra advocating for a cut. This represents a shift from the previous 5-4 vote favoring a reduction. The committee also voted to continue with quantitative tightening at a rate of £100 billion per year.
Governor Andrew Bailey mentioned that most committee members believe a gradual approach to reducing rates is appropriate. The committee also unanimously agreed to reduce the stock of UK government bonds held for monetary policy purposes by £100 billion over the next year, bringing it to £558 billion.
The decision statement emphasized that monetary policy will remain restrictive until inflation risks are mitigated. Although oil prices have decreased, CPI inflation remained at 2.2% in August and is anticipated to rise to around 2.5% by year-end, largely due to last year's lower energy prices.
Economist Paul Dales from Capital Economics noted that the BoE’s stance indicates a gradual reduction in rates, contrasting with the US Federal Reserve's more aggressive rate cut. Dales believes that only one rate cut is likely this year, at the November meeting, rather than the two anticipated by the markets.
Rob Wood from Pantheon Macroeconomics described the guidance as more hawkish than expected and forecasts a similar outcome, with one more rate cut this year and three in the next. Wood highlighted that the gradual approach mentioned suggests a high threshold for consecutive rate cuts and larger reductions.
Isaac Stell from Wealth Club observed that the decision comes despite a drop in inflation expectations and slower economic growth projections. He questioned whether this implies a more manageable upcoming budget, noting that the lack of budget discussion in the MPC minutes could signal less severe fiscal measures.
Myron Jobson, senior personal finance analyst at Interactive Investor, noted that the personal finance landscape is evolving with the anticipation of further rate cuts. Recent mortgage rate reductions may encourage prospective buyers and homeowners nearing the end of fixed-rate deals to delay securing new rates until more favorable terms become available.
