FX.co ★ BoE Keeps Rate Steady, Maintains Pace Of Gilt Stock Reduction

The Bank of England (BoE) decided on Thursday to maintain its benchmark interest rate at 5.00 percent and proceed with reducing its government debt holdings, making a cautious move in contrast to the U.S. Federal Reserve's more aggressive rate cut of half a percentage point the previous day.

The BoE's Monetary Policy Committee (MPC), led by Governor Andrew Bailey, voted 8-1 to keep the Bank Rate unchanged. This decision aligned with market expectations, which had anticipated a rate cut next month.

In its August meeting, the MPC narrowly voted 5-4 to lower the rate by a quarter-point from its 16-year high of 5.25 percent. This month, Swati Dhingra was the sole member opting for an additional 0.25 percentage point cut to 4.75 percent.

The MPC unanimously agreed to diminish the stock of UK government bond purchases by GBP 100 billion over the next twelve months, reaching a total of GBP 558 billion. Policymakers emphasized their intention to use the Bank Rate as the primary tool for adjusting monetary policy.

"In the absence of substantial developments, a gradual approach to removing policy restraint remains appropriate," stated the BoE. The central bank reiterated that maintaining a restrictive monetary policy will be necessary for a prolonged period.

The BoE's announcement came on the heels of the U.S. Federal Reserve's unexpected half a percentage point rate cut on Wednesday—the first reduction in over four years. Despite the BoE's more guarded stance compared to its American counterparts, ING economist James Smith suggested that the BoE might grow more confident in its inflation outlook, potentially accelerating the pace of rate cuts.

Capital Economics' economist Paul Dales predicted that the BoE would reduce the rate by 25 basis points at its next meeting in November. He added that the pace of rate cuts might quicken next year, with rates possibly falling to 3.00 percent, lower than the 3.25-3.50 percent currently priced into markets.

BoE staff forecast the UK economy to grow by 0.3 percent in the third quarter, slightly down from the 0.4 percent projected in August. Inflation is expected to rise to around 2.5 percent by the year's end, as the impact of last year's decline in energy prices fades from the annual comparison.