The Bank of England held rates at 5.00% today in a move that wasn't certain but wasn't entirely expected. Economists at Deutsche Bank forecast no change and after the announcement spike, the pound gave back gains.
DB highlighted three takeaways from the decision:
1)There was only one dissent in the 8-1 vote. They thought there would be two dissents.
"While we expected a more divided MPC, today's decision highlighted a less divided Committee, with the vote tally coming in at 8-1."
2) They thought the BOE might be more dovish.
"The MPC struck a more cautious tone than we expected. But the door remains wide open for a Q4 rate cut. Indeed, for the majority of the MPC, "a gradual approach to removing policy restraint would be warranted"."
3) No changes to the balance sheet policy
Third, the Bank left its quantitative tightening (QT) envelope fixed at GBP 100bn. What does this signal? By maintaining a steady QT envelope, the MPC has implicitly signalled that the Bank puts more weight on the total stock of gilt reduction as opposed to the Bank’s active sales footprint. Total sales for the next 12m now will total GBP 13bn, lowering the impact on cash borrowing for the remainder of the current fiscal year and the next fiscal year (i.e. 2025/26).
With this, they continue to see just one more rate cut this year in opposition to market pricing showing 41 bps in easing this year. They see four further cuts in 2025. On both fronts, they highlight that risks are tilted to faster easing. At the same time, they see upside risks to their terminal view of 3.00% if cuts are front-loaded.
DB also highlighted some important points on the inflation view:
There were three important takeaways in the MPC's discussion of inflation. First, inflation expectations continued to normalise as headline CPI remained two-tenths above the BoE's 2% target. Second, services inflation continues to moderate, with the Bank's measure of a seasonally-adjusted metric averaging around 4% in the three months to August (close to the average since the end of 2023). The stable reading was seen as a sign that "further pass-through from lower labour costs and easing inflation was still to come" – pointing to increased confidence in the inflation outlook. Third, Bank staff remained confident that services inflation would moderate further in Q4-24.
