Closing post
Time to wrap up…
The Bank of England has left interest rates on hold at 4% and will slow the pace of its “quantitative tightening” programme in the year ahead to avoid distorting jittery government bond markets.
The central bank’s nine-member monetary policy committee voted 7-2 to leave borrowing costs unchanged, after five cuts since summer 2024, including a reduction last month.
Two members of the committee, Swati Dhingra and professor Alan Taylor, voted for another quarter-point rate cut this month.
The committee also decided to slow the pace of reductions to its balance sheet through quantitative tightening (QT), which involves selling off the government bonds the Bank accumulated through the emergency policy of quantitative easing after the 2008 financial crisis.
QT will be slowed to £70bn over the next year, down from a £100bn reduction in bond holdings over the last 12 months.
But the Bank will still actually conduct more active bond sales than over the last year, as fewer of its bonds will mature over the next 12 months.
The Bank governor, Andrew Bailey, said:
“Although we expect inflation to return to our 2% target, we’re not out of the woods yet so any future cuts will need to be made gradually and carefully.”
Bailey also told broadcasters that he expects the Bank to cut rates further in the coming months, saying:
“I continue to think that there will be some further reductions, but I think the timing and scale of those is more uncertain now.
We are also seeing softening in the labor market going on, and there is a risk that could, of course, get larger. It’s a risk rather than a central expectation.”
City economists are split over when the next rate cut could come – some suggest as soon as November, but others think it could take until February 2026, or longer…
Here’s our analysis of the Bank’s decision:
Daniel Vernazza, chief international economist at UniCredit, reckons the City is underestimating how rapidly the Bank of England will cut interest rates.
We still expect the MPC cut the bank rate by 25bp on 6 November, to 3.75%, as the labour market is likely to continue to deteriorate.
But we no longer expect a sequential cut in December and the risk is that the MPC delays cutting again to next year. Some MPC members want to wait to see the extent of second round effects from higher actual inflation, which will take some time to assess.
The Chancellor’s Autumn Budget on 26 November, when she is likely to tighten fiscal policy to keep to her fiscal rules, could also be a reason to wait. While the timing of the next rate cut is now more uncertain, we still expect more and faster rate cuts than financial markets, to 2.75% by the end of next year (vs. market expectations of 3.6%).
