Monetary policy remains steady with Bank of England maintaining interest rates and curbing quantitative tightening.
In a significant development, the Bank of England (BoE) has decided to keep its key interest rate at 4% in its latest meeting, with the Monetary Policy Committee (MPC) voting 7 to 2 in favour of this decision. This decision comes amidst a delicate economic situation, with Chancellor Rachel Reeves struggling to balance the UK's books and persistent inflation and labour market conditions causing uncertainty.
John Wyn-Evans, head of market analysis at investment firm Rathbones, described this meeting as another milestone on the road to the most important event between now and Christmas – the budget.
The BoE's decision not to cut interest rates in December is still seen as likely by traders, but any future cuts will need to be made gradually and carefully, according to the BoE's governor, Andrew Bailey. He also stated that the new target allows the MPC to continue reducing the size of the BoE's balance sheet while minimizing the impact on gilt market conditions.
The BoE's decision to reduce the annual sale rate of bonds from £100bn to £70bn is part of its quantitative tightening programme. This move is controversial, as it is part of its annual decision over the reversal of its crisis-era quantitative easing programme. The BoE has been selling off bonds bought during the financial crisis and COVID-19 as part of its economic rescue measures, and will now sell fewer long-dated government bonds in the future.
Reports suggest that the Office of Budget Responsibility is set to reduce its forecast for the UK's productivity growth. The government is reportedly hoping for lower interest rates to stimulate the housing market and consumer demand. However, the BoE's decision to hold interest rates was not unanimous, with two of the seven MPC members voting for a 0.25 percentage point cut.
The BoE's independence is being displayed at a time when investors are nervous that central banks are at risk of succumbing to control from political leaders. This is particularly evident in the battle between the White House and the US Federal Reserve, which is being seen as critical.
The BoE's decision to hold interest rates is expected to be maintained in November, but economists expect a possible 0.25% cut either in November or December. Mr. Bailey has stated that the BoE's interest rates are expected to return to the 2% target, but any future cuts will need to be made with caution due to the ongoing economic challenges.
In conclusion, the Bank of England's latest decision to hold interest rates and reduce the sale rate of bonds is a significant move in the current economic climate. The BoE is carefully navigating the challenges faced by the UK economy while maintaining its independence and adhering to its monetary policy objectives.
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