Bank of England presses pause on rate cuts, highlights ‘gradual approach’

LONDON — The Bank of England on Thursday said it would hold interest rates steady following its initial cut in August, even after the U.S. Federal Reserve opted for a jumbo rate cut the day before.

The Monetary Policy Committee voted by 8 to 1 to hold, with the dissenting member voting for another 0.25 percentage point cut.

A “gradual approach” to monetary easing remained appropriate, with services inflation remaining “elevated,” the committee said. The U.K. economy, which has returned to growth but 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 MPC was assessing a mixed bag of data in making its rate decision, with headline inflation consistently coming in near to its 2% target but price rises in services — accounting for around 80% of the U.K. economy — ticking higher to 5.6% in August. Wage growth in the U.K. cooled to a more than two-year low over the three months to July, but remained relatively high at 5.1%.

The British pound was bolstered by the BOE and Fed announcements, trading up 0.72% against the U.S. dollar at $1.3306 at 12:10 p.m. London time Thursday. That was the highest rate since March 2022, according to LSEG data.

Global equity markets meanwhile rallied Thursday, with the pan-European Stoxx 600 index 1.4% higher.

Also being monitored Thursday was 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 twelve months through active sales and the maturation of bonds.

That amount was in-line with the prior period, against the expectation of some for an acceleration of the program. The BOE’s balance sheet swelled during the pandemic as it sought to boost the economy, before it reversed course and began QT in February 2022.

The BOE sustains losses on its QT program, subsidized by the taxpayer, because bonds are being sold for lower prices than they were bought for. However, BOE Governor Andrew Bailey argues the central bank needs to conduct QT now to have space to undertake more quantitative easing or other operations in the future.

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

Fed Chair Jerome Powell told a news conference the central bank was “trying to achieve a situation where we restore price stability without the kind of…