Bank of England holds interest rates steady at 5% amid ongoing bond reduction strategy

New Delhi

The Bank of England (BoE) has decided to maintain its key interest rate at 5 per cent, following a recent trend of cautious monetary policy adjustments. The decision, made by the Monetary Policy Committee (MPC) with an 8-1 vote, comes as inflationary pressures appear to be easing. Only external member Swati Dhingra voted for a reduction, suggesting a more gradual approach to interest rate cuts compared to recent moves by the US Federal Reserve as detailed in a report by Reuters.

The BoE's stance reflects a careful balancing act in response to evolving economic conditions. Governor Andrew Bailey noted that while inflation is expected to rise slightly to approximately 2.5 per cent by the end of the year, it remains crucial to avoid aggressive rate cuts that could destabilise the economy. "It's vital that inflation stays low, so we need to be careful not to cut too fast or by too much," Bailey stated.

Market analysts had anticipated this decision, with many predicting a steady rate after last month’s narrow vote to lower borrowing costs from a 16-year high. Economists polled by Reuters had forecast a 7-2 vote in favour of maintaining rates, aligning with the BoE's cautious outlook.

In contrast to the BoE's approach, the US Federal Reserve recently enacted a more significant cut of 0.5 percentage points, signalling confidence in cooling inflation pressures in the US economy. This divergence in monetary policy highlights differing economic conditions and expectations between the UK and the US.

Quantitative tightening continues

In addition to holding interest rates steady, the BoE has extended its quantitative tightening (QT) programme for another year, maintaining its pace of £100 billion in bond reductions. The MPC voted unanimously to continue this strategy starting October 2024, which involves allowing British government bonds (gilts) purchased during previous economic stimulus efforts to mature without reinvestment.

This QT process aims to mitigate the upward pressure on the BoE's bond holdings and provide flexibility for future monetary policy adjustments. However, some lawmakers and financial analysts have raised concerns about potential losses incurred by the BoE as it sells gilts purchased at higher prices than their current market value.

Despite these concerns, the BoE remains committed to its QT strategy, asserting that it is essential for maintaining a stable monetary environment. The central bank emphasised that it is crucial for QT to proceed smoothly and without significant disruption to overall monetary policy.

Way ahead for the Bank of England

Investors are closely monitoring the BoE's decisions as they anticipate potential interest rate cuts over the next year. Current market expectations suggest around five quarter-point reductions by June 2025, aligning with forecasts for other central banks like the European Central Bank (ECB). However, analysts believe that persistent inflationary pressures may lead the BoE to adopt a more measured approach compared to its counterparts.

As Britain navigates these economic challenges, the BoE's commitment to maintaining stability while cautiously adjusting its monetary policy will be pivotal in shaping the nation's economy in the coming months.