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The Bank of England (BOE) will meet on September 18th, expected to keep interest rates unchanged at 4% due to a rebound in inflation.
This could change the BOE’s stance on interest rates and lead to fewer cuts. Markets are also focusing on bond sales, inflation, quantitative tightening and forward guidance.
No Rate Change
The BOE is widely expected to keep rates unchanged at 4%, as economists remain divided in their forecasts. Some expect a 25-basis point cut in November while others expect no rate changes for the rest of the year.
Inflation remains a primary concern for the BOE. Prices climbed back up again above the BOE’s 2% target after peaking at 11% in 2022. The cost of living remains high, with inflation for August expected to come in at 3.9% on Wednesday, not expected to return near the target until 2027. ⁽¹⁾
Labor market data does not really indicate the need for a rate cut, as average weekly earnings rose 5% in June, while inflation stood at 3.8% YoY in July. Services and energy inflation are the main contributors to the elevated inflation. ⁽²⁾
UK unemployment stayed at 4.7% from May to July, with employment rising by 238K, above expectations. However, the August claimant count increased by 17.4K. ⁽³⁾
Slowing the Pace of Bond Sales and Political Pressure
The BOE has been reducing government bond holdings from £875bn in 2022 to £558bn. British 30-year government bond yields, which move opposite to prices, hit their highest since 1998 on September 3rd while new 10-year debt sold at the highest yield since 2008, putting pressure on Finance Minister Rachel Reeves before her November 26 budget. ⁽⁴⁾
As the BOE loses money on the holdings, a decision to slow the pace of bond sales would increase the costs to British taxpayers. That would be bad for Reeves, who already needs to raise as much as £35 billion after higher borrowing costs, a weaker growth outlook and a series of policy changes heavily hurt her fiscal plans. ⁽⁵⁾
Key Things to Watch This Week
Markets will be watching for three things from the Bank of England:
Vote Split
As interest rates are expected to remain on hold, the MPC vote could give insights on the probabilities of a November rate cut. Dissenters may push for further easing, but history shows vote splits are not always predictive.
Forward Guidance
The Bank of England has adopted a gradual and cautious stance on easing monetary policy. Any changes could indicate the trajectory of the rate-cut cycle.
Quantitative Tightening Updates
Updates on bond sales and adjustments in sales of longer-dated gilt yields could have an impact on long-term borrowing costs
Looking Ahead
The BOE is expected to keep rates on hold, slow the pace of QT, and signal insights on the November decision. High inflation, elevated bond yields, and government borrowing pressures could mean that rate cuts are not imminent, but the central bank remains vigilant to economic and market condition changes.
