Bank of England holds interest rates, British pound rallies to more than two-year high – CNBC

LONDON — The Bank of England said on Thursday it would keep interest rates on hold following its first cut in August, despite the U.S. Federal Reserve's decision to cut rates more sharply the previous day.

The Monetary Policy Committee voted 8-1 to keep the rate unchanged, with members who voted against voting in favour of a 0.25 percentage point cut.

The committee said a “gradual approach” to monetary easing remained appropriate as services inflation “remains elevated”, adding that the UK economy has returned to growth but has been weak this year and is expected to recover to underlying growth of around 0.3 percent per quarter in the second half of the year.

The British pound rose on both announcements, up 0.72% against the U.S. dollar to trade at $1.3306 as of 12:10 p.m. London time on Thursday, its highest level since March 2022, according to LSEG data.

Meanwhile, global stock markets rose on Thursday, with the pan-European Stoxx 600 index rising 1.35%.

Also closely watched on Thursday is the Bank of England's annual announcement on the pace of quantitative tightening (QT), which has decided to reduce its holdings of government bonds by 100 billion pounds ($133 billion) over the next 12 months through aggressive sales and debt redemptions.

This amount was the same as the previous period, contrary to some people's expectations of an acceleration of the program.

The Bank of England has lost money on its taxpayer-subsidized QT program because it bought bonds at higher prices than they were sold for in the past, but Bank of England Governor Andrew Bailey has argued that QT needs to be implemented now to leave room for further quantitative easing and other operations in the future.

The committee is assessing a range of data, including that headline inflation is moving closer to its 2% target, while price increases in the services sector, which accounts for about 80% of the UK economy, rose slightly to 5.6% in August. UK wage growth fell to its lowest level in more than two years in the three months to July but remains relatively high at 5.1%.

The Bank of England affirmed its unchanged outlook even after the U.S. Federal Reserve kicked off its current cycle of rate cuts with a 50 basis point cut on Wednesday. Many strategists had expected a smaller 25 basis point cut at the September meeting, even though market prices up until this week suggested a more aggressive option with a more than 50% chance.

Fed Chairman Jerome Powell told a news conference that the central bank was “seeking to achieve a condition that restores price stability without the painful increases in unemployment that have sometimes accompanied this inflation.”Recent U.S. labor market data had raised concerns about the extent of the slowdown in the world's largest economy.

The British pound rose following the Fed's announcement, trading 0.5% higher at $1.327 against the U.S. dollar as of 11:15 a.m. London time on Thursday. Meanwhile, global stock markets rose, with pan-European shares trading at Stocks 600 The index rose 1.34%.

The Bank of England narrowly cut interest rates from 5.25% to 5% by a 5-4 vote in August and was widely expected to keep rates on hold until its next meeting in November.

Frederic Ducrozet, head of macroeconomic research at Pictet Wealth Management, said the QT programme put the Bank of England “in the middle because of choices it made in the past” because it was the only central bank in the world to record these kinds of losses.

Britain's new Labour government is due to present its first budget in October. Extending passive and active QT until next year “would be a drag on fiscal policy, or at least it wouldn't make the government's job any easier,” Ducrozet told CNBC's “Street Signs Europe” shortly before the decision was made.

“Otherwise it will look like we're not really independent from the government, we'll have more losses and we'll have to manage that over time,” he said.