Bank Of England Vows Gradual Approach To Easing As Rates Held In 8-1 Vote

(Bloomberg) -- The Bank of England warned investors it won’t rush to ease policy, as it held fire on another cut in borrowing costs and reached a separate decision to preserve the pace of its balance-sheet wind-down. 

The Monetary Policy Committee voted 8-1 to keep rates steady at 5%, an outcome whose caution contrasts with the half-point reduction delivered in the US on the eve of the UK announcement on Thursday. That was in line with the expectations of economists and markets.

“We should be able to reduce rates gradually over time,” Governor Andrew Bailey said in a statement, stressing that such a path would depend on price pressures continuing to ease. “It’s vital that inflation stays low, so we need to be careful not to cut too fast or by too much.”

The BOE’s wary tone on the prospect of future loosening may dampen expectations in markets for the central bank to shift to quicker easing in borrowing costs later this year. Ahead of the meeting, investors had ramped up bets on successive moves from November, though policymakers didn’t explicitly endorse a change at their next gathering.

The BOE decision on how to reverse 14 back-to-back hikes arrives in the wake of the Federal Reserve’s 50 basis-point salvo on Wednesday. Officials in London didn’t know the result of the meeting in Washington when they reached their own judgment.

The vote shows that recent data featuring slower-than-expected inflation and the UK economy’s recovery fizzling out has yet to convince officials that the threat from consumer prices has been sufficiently contained. Swati Dhingra, the committee’s most dovish member, was the sole voice backing an immediate quarter-point reduction.

The panel also maintained the £100 billion ($132 billion) a year pace of its balance sheet run-off, in a unanimous decision on quantitative tightening. 

That means the amount of active gilt sales by the central bank will plunge to around £13 billion in the 12 months from October, down from the current pace of £50 billion. The outcome was in line with market and economists’ expectations. Officials said there’s a “high bar” to tweaking the planned shrinking in its stock of gilts in the interim.

The BOE reduced rates for the first time in over four years last month in a tight 5-4 vote, with Chief Economist Huw Pill in the hawkish ranks opposing a move. However, the policy guidance in Thursday’s minutes added language that warned investors that officials will take their time in reversing the most aggressive tightening in decades.

“In the absence of material developments, a gradual approach to removing policy restraint remains appropriate,” the minutes said. 

The guidance reiterated their preference for a meeting-by-meeting approach and the need for policy to remain “restrictive for sufficiently long.”

The vow for a patient stance comes despite recent data suggesting that the threat from consumer prices is fading. Data on Wednesday showed inflation held at 2.2% in August, staying below the BOE’s forecast for 2.4%. Wage growth has continued to gradually ease and the economy has cooled, with gross domestic product stagnating in three out of the last four months.

The BOE said that it now expects output growth to slow to 0.3% in the third quarter, slightly weaker than the 0.4% predicted in its August forecasts. Inflation is anticipated to pick up to 2.5% by the end of the year, slightly lower than the 2.8% previously projected.

The UK decision is just one moving part in a pivotal week for central banks. Aside from the Fed rate cut, Brazilian officials raised borrowing costs for the first time since 2022, while Norwegian officials signaled no intention to ease until 2025.

Later on Thursday, South African policymakers may deliver a reduction, and on Friday, the Bank of Japan will deliver its first rate judgment since its hike at the end of July sowed the seeds of a global selloff.