Commuters cycle past the Bank of England (BOE) (left) in the City of London, England, Monday, September 16, 2024.
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LONDON – The Bank of England said on Thursday it would keep interest rates steady following its first cut in August, despite the Federal Reserve opting to cut interest rates sharply the day before.
The Monetary Policy Committee voted 8 to 1 to remain unchanged, with dissenting members voting in favor of a 0.25 percentage point rate cut.
The committee said “gradual” monetary easing remains appropriate and services sector inflation remains “high.” The report added that the British economy has returned to growth this year, but its performance is sluggish, and is expected to return to a basic growth rate of about 0.3% per quarter in the second half of the year.
Buoyed by both announcements, GBP/USD was up 0.72% at $1.3306 at 12:10 noon London time on Thursday. This is the highest rate since March 2022, according to LSEG data.
Meanwhile, global stocks rose on Thursday, with pan-European stocks Stoke 600 The index rose 1.35%.
Also being closely watched on Thursday is the Bank of England’s annual announcement on the pace of quantitative tightening (QT). The central bank voted to reduce its stock of bonds, known as government bonds, by 100 billion pounds ($133 billion) over the next 12 months through active sales and bond maturities.
The amount is unchanged from the previous period but contrary to some expectations of an acceleration in the program.
The BoE has suffered losses on the taxpayer-subsidized QT scheme because in the past it paid more to buy them than to sell them. However, Bank of England Governor Andrew Bailey believes QE is needed now to leave room for more QE or other operations in the future.
The committee is assessing a mix of data, with headline inflation staying close to the 2% target but rising prices in services – which account for about 80% of the UK economy – rose to 5.6% in August. In the three months to July, wage growth in the UK fell to a more than two-year low, but remained at a relatively high level of 5.1%.
Even after the Fed raised interest rates on Wednesday, the Bank of England confirmed its expectation of keeping rates unchanged started its own interest rate cuts this cycle A reduction of 50 basis points. While markets this week are pricing in a more than 50% chance of a more aggressive approach, many strategists expect a smaller rate cut of 25 basis points at the September meeting.
Fed Chairman Jerome Powell In a press release, the central bank “is working to achieve a situation that restores price stability while avoiding the painful rise in unemployment that sometimes comes with inflation.” Recent U.S. labor market data It has raised concerns about the extent of the slowdown in the world’s largest economy.
Boosted by the news from the Federal Reserve, the pound rose 0.5% against the dollar, to $1.327 at 11:15 am London time on Thursday. Meanwhile, global stock markets rose, with pan-European stocks Stoke 600 The index rose 1.34%.
bank of england Reduce key interest rates The tight 5-4 vote raised the vote to 5% from 5.25% in August and is widely expected to hold until the next meeting in November.
GBP/USD
Frederik Ducrozet, head of macroeconomic research at Pictet Wealth Management, said on the QT scheme that the Bank of England was “between a rock and a hard place because of the choices they have made in the past” but also because of the is the only central bank in the world to record such losses.
The new British Labor government will submit its first budget in October. Ducrozette told CNBC’s “Signpost Europe” shortly before the decision that extending passive and active QT until next year would “create problems for fiscal policy and at least not make the government’s job easier.” .
“Or you don’t, then you don’t appear to be truly independent from the government, you suffer more, and you have to manage it over time,” he said.
