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The Bank of England has held interest rates at 5 per cent after inflation remained steady in August, but indicated it may lower borrowing costs again as soon as November.
The Monetary Policy Committee’s eight-to-one decision on Thursday came after it cut borrowing costs by a quarter point at its meeting last month.
In a signal that another rate reduction is likely as soon as its next meeting in November, the BoE said it would take a “gradual” approach to loosening policy, assuming there are no material changes in the economy.
Sterling rose briefly hitting its strongest level against the dollar since March 2022, before pulling back but remained up 0.3 per cent on the day at $1.3251.
Interest rate sensitive two-year gilt yields rose to 3.94 per cent, up 0.03 percentage points on the day.
Andrew Bailey, the bank’s governor, said inflationary pressures were easing and that the economy was evolving “broadly as we expected”.
“If that continues, we should be able to reduce rates gradually over time,” he said. “But it’s vital that inflation stays low, so we need to be careful not to cut too fast or by too much.”
The BoE decision came a day after the US Federal Reserve cut rates by half a point and a week after the ECB made its second quarter-point reduction of the year.
While the BoE cut rates in August, it is treading a wary path towards lower borrowing costs and said on Thursday its decisions were guided by the need to “squeeze” persistent inflationary pressures out of the system.
The meeting puts the BoE on a “glide path to a November rate cut,” said Rob Wood, chief UK economist at Pantheon Macroeconomics.
“Underlying inflation pressures continue to ease, but the broad data flow suggests little need for urgency,” he added.
UK inflation held steady at 2.2 per cent in August — far below its 2022 peak of more than 11 per cent and close to the BoE’s 2 per cent target. But services price inflation has recently edged up.
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The MPC predicted that inflation will edge higher to 2.5 per cent towards the end of the year, while the economy will grow at a subdued 0.3 per cent quarterly pace in the second half.
The minutes to Thursday’s meeting said MPC members held a “range of views” over how entrenched domestic inflationary pressures will prove, adding that most believed that further gradual rate reductions will be needed.
The only MPC member to dissent from Thursday’s decision to keep rates unchanged was Swati Dhingra, an external member, who is the most dovish rate-setter and called for an immediate quarter-point reduction to 4.75 per cent.
Rate-setters at the BoE meeting made no change to the pace of quantitative tightening — its policy of shrinking its balance sheet. This means that bond holdings will be reduced by £100bn in 2024-25.
The BoE is focusing more on alternative economic scenarios following a critical report by former Fed chair Ben Bernanke. Thursday’s minutes referred to three possible future economic cases.
In one, inflation would come down as the impact of global shocks such as the pandemic and the Ukraine war faded away. In another, lower growth would be needed to bring inflation down. In a third case, persistent inflation would mean monetary policy would have to remain tighter for longer.
