- Bank of England votes to keep base rate at 4%, with a 7-2 majority
- Two members of the Bank’s rate-setting committee voted to reduce base rate to 3.75%
- Unlikely there will be any substantial movements in the mortgage or cash savings markets
- Quantitative Tightening (QT) scaled back but Bank of England gilt sales will be higher
- Rachel Reeves wants government departments to lower consumer prices
Laith Khalaf, head of investment analysis at AJ Bell, comments on the latest interest rate decision from the Bank of England:
“To precisely no-one’s surprise, the Bank of England has chosen to keep rates on hold at 4%. This was entirely anticipated by the market, and means we shouldn’t expect any substantial movements in the mortgage or cash savings markets. It’s significant that two members of the rate-setting committee wanted to reduce base rate to 3.75%, which perhaps provides some crumbs of comfort for those who want the Bank to loosen its stance on monetary policy.
“Inflation is still elevated and the Bank expects it to remain around current levels for the rest of the year. That means we should watch out for any big changes in the inflation number, as well as keeping an eye on the labour market to estimate where the Bank is likely to go. The interest rate committee felt there hasn’t been a huge shift in the economic data since they voted to cut rates in August, and on that front they are probably right. Markets now think it’s an outside chance we’ll get a rate cut by the end of this year.
“The Bank has also decided to scale back its Quantitative Tightening programme, from a £100 billion reduction in gilt holdings achieved over the last year to £70 billion targeted over the coming 12 months. Due to the maturity profile of the gilt holdings, this will however mean an extra £8 billion of gilt sales in the coming year. The £70 billion figure is pretty much on the nose of what was expected by the market, as detailed by a survey conducted by the Bank last month. This begs the question, if survey respondents had anticipated less QT, would the Bank have felt obliged to comply by the frisky conditions currently at play in the gilt market?
“The Bank seems confident QT is not having a big effect on the present state of the gilt market, which does look to be highly correlated with overseas developments. The good news for Rachel Reeves is that 30-year bond yields have moved down over the course of this month, from a peak of almost 5.7% to just over 5.4% now. This has closely tracked downward movement in yields in long-dated US Treasury bonds, as investors have digested a weaker US labour market and an interest rate cut from the Fed.
“There is now just one more interest rate decision before the November Budget, and Rachel Reeves would dearly love to see some more dovish vibes coming from the Bank of England to relieve some pressure on the public finances. The exchange of letters between the governor and the chancellor today is all pretty perfunctory, though Rachel Reeves does say that she and the prime minister have asked government departments to look at what can be done to lower consumer prices ahead of the Budget. Whether anything comes of that remains to be seen, but tax rises rather than inflation controls will almost certainly be the main thrust of the Budget in November, like it or not.”
