The Bank of England left the bank rate on hold at 4.75%, as expected. Three out of nine monetary policy committee members voted to cut rates, however, which came as a surprise to many market participants. Analysts are divided about how much the central bank will cut interest rates next year as inflation remains relatively high while the economy struggles. The following is a selection of analyst comments.
Bank of England Plays Risky Strategy With Dovish Tone
1546 GMT - The more cautious approach to interest-rate cuts signaled by the Bank of England feels risky, Berenberg's Andrew Wishart says in a note. Any positive impulse to demand would allow firms to pass on more of the large increase in labor costs they face to customers by raising prices, keeping inflation higher for longer, he says. Until now, the bank's focus has been squarely on inflationary pressure, which has been higher than expected since the last meeting. But the three dissenters from the BOE's December hold suggest high rates risk a "large output gap". However, above-target inflation limits room for cuts ahead, with rises in the minimum wage and higher taxation on employers to come, Wishart says. (edward.frankl@wsj.com)
BOE Needs to Balance Inflation Risks Against Stabilizing Economy
1516 GMT - The Bank of England will have to balance keeping inflation low with ensuring the economy doesn't weaken too much, Richard Flax, chief investment officer at Moneyfarm says in a note. This is likely to result in a cautious approach to interest-rate cuts in 2025. "The BOE has indicated that approximately two rate reductions are expected next year," he says. This "underscores the BOE's commitment to carefully balancing inflation control with economic stability in an uncertain environment." (miriam.mukuru@wsj.com)
Sterling's Fall Against Euro Likely to Prove Brief
1514 GMT - Sterling's fall against the euro after the Bank of England's 6-3 vote to leave interest rates unchanged Thursday will probably be temporary, Danske Bank analyst Kirstine Kundby-Nielsen says in a note. While three BOE members voted for a rate cut, the central bank retained its guidance for a gradual approach to monetary policy easing. "The still cautious guidance delivered today highlights the more gradual approach of the BOE compared to European peers," she says. That supports the case for EUR/GBP to move lower. Relative U.K. economic outperformance and tight credit spreads also argue for the exchange rate to fall. EUR/GBP rises 0.4% to 0.8270.(renae.dyer@wsj.com)
BOE Decision Tilts in Favor of Future Rate Cuts
1502 GMT - The Bank of England's policy update Thursday tilts more towards favoring future interest-rate cuts as three members voted against its decision to leave rates steady, Monex Europe's Nick Rees says in a note. The three policymakers who preferred a rate cut included new BOE member Alan Taylor. This suggests the balance of opinion has shifted towards favoring rate cuts since his appointment, Rees says. While the BOE highlighted inflation persistence, it also flagged weakening activity indicators and appeared "notably dismissive" of Tuesday's stronger-than-expected wage data. "With this in mind, we are also retaining our call for 100 basis points of easing next year, likely to be delivered at a one-cut-per-quarter pace." The BOE could cut rates again in February. (renae.dyer@wsj.com)
U.K.'s Weakening Economic Activity Weighs on BOE Policymakers
1501 GMT - The Bank of England will cut interest rates quicker than investors expect, Capital Economics deputy chief U.K. economist Ruth Gregory says. The 6-3 vote in favor of keeping rates unchanged, with the minority wanting to reduce rates, showed the BOE was more open to cutting rates than had been expected, she says in a note. Weak U.K. economic activity appears to be weighing increasingly on policymakers' minds. Members voting for an immediate rate cut expressed concern that sluggish demand created a risk of inflation falling too far below the 2% target, Gregory says. The BOE also appears to have downplayed the significance of the sharp rise in private-sector pay growth, highlighting that it "tends to be volatile," she says. (edward.frankl@wsj.com)
BlackRock Expects BOE Rate to Settle Closer to 3% Eventually, Favors Gilts
1407 GMT - The Bank of England's bank rate is expected to eventually settle closer to 3% after 2025, BlackRock's Vivek Paul says in a note. The BOE's terminal rate is likely to be higher than in the pre-pandemic era but below current market pricing, Paul says. BlackRock therefore has an overweight recommendation on U.K. gilts across all maturities. The BOE is expected to exercise caution in cutting interest rates due to the "challenging mix of persistent inflation and slower growth", Paul says. (miriam.mukuru@wsj.com)
Sterling Looks Vulnerable After BOE Rate Decision
1402 GMT - Sterling looks vulnerable to a further correction lower after the Bank of England voted 6-3 to leave interest rates steady on Thursday, with three policymakers favoring a rate cut, TD Securities analysts say in a note. Speculators investors have scaled back long positions in sterling--or bets on the currency rising--after the announcement, they say. However, positioning still remains relatively long compared to non-dollar currencies. This leaves sterling at risk of a further correction, especially if incoming data and the BOE's slightly less cautious stance make markets reassess its rate-cut expectations. (renae.dyer@wsj.com)
Bank of England Looks to Be Preparing for Cuts Due to Weak Economy
1340 GMT - The Bank of England's focus seems to be gradually turning toward the U.K.'s troublingly weak economy, Francesco Pesole at ING writes to clients. The bank's monetary-policy committee opted Thursday to stick rather than twist on the Bank Rate, but with more rate setters than expected voting to bring it lower. "The apparent growing dovish front within the MPC in spite of the latest hawkish wage data potentially suggests a greater focus on slowing activity," Pesole says. Data this week showed Britons' average pay growth again picking up pace. ING expects the BOE to lean into cuts next year, taking the key rate down by a point and a half in total.(joshua.kirby@wsj.com; @joshualeokirby)
BOE Policymakers Appear Divided, Rate Cuts Likely to Be Cautious Ahead
1334 GMT - The Bank of England's announcement highlights the complex outlook for the U.K. economy, Ebury's Matthew Ryan says in a note. Fragile consumer demand is counterbalanced by the pro-inflationary implications of the autumn Budget and U.S. President-elect Donald Trump's tariff proposals, he says. In view of these elevated risks to inflation, Ebury thinks that BOE's doves--those favoring rate cuts--will get their way in 2025. But Ebury remains of the view that the BOE will lower rates only twice through the end of next year. "Bank of England officials appear more divided than ever on the path ahead for U.K. interest rates," says Ryan, who is Ebury's head of market strategy. (emese.bartha@wsj.com)
BOE Decision Could Weigh on Sterling, Gilt Yields
1323 GMT - The Bank of England's 6-3 vote to leave interest rates unchanged Thursday should leave sterling slightly weaker and U.K. government bond yields pausing recent gains, Ed Hutchings at Aviva Investors says in a note. The decision to hold rates at 4.75% was expected but the three dissenters who voted for a rate cut was perhaps more than the market had anticipated, he says. "The minutes still struck a cautious tone around the balance between both the inflation and employment dynamics, with a gradual move to lower rates from here still anticipated." However, there is a "small shift" in its stance. The BOE could cut rates again in February. (renae.dyer@wsj.com)
Bank of England Set to Cut Rates Cautiously in 2025
1322 GMT - The split 6-3 vote in the Bank of England's decision to hold its key interest-rate suggests a cut at its next meeting in February is very much in play, says Suren Thiru, economics director of the Institute of Chartered Accountants. But the bank risks backing itself into a corner over the pace of policy loosening. With inflation likely to drift higher, the timing of future rate cuts could become increasingly complex. "Against this backdrop, rate setters are likely to take baby steps in cutting interest rates over the next year, particularly in the face of growing domestic and international inflation risks," he says. (edward.frankl@wsj.com)
U.K. Faces Higher-For-Longer Rates After BOE Decision
1306 GMT - The U.K. economy will likely need to adjust to higher-for-longer interest rates as the Bank of England remains cautious about policy easing, HSBC Asset Management's Hussain Mehdi says in a note. The BOE voted 6-3 to leave rates unchanged on Thursday and reiterated that a gradual pace of rate reductions remains appropriate. The market is pricing in just two rate cuts for 2025. "While we think risks are tilted towards more rate reductions amid signs of weakening demand for labor, the reality is inflation is proving stubborn and persistent," Mehdi says. Rates are unlikely to drop much below 4%, he says.(renae.dyer@wsj.com)
BOE's Inflation Mandate Ties Its Hands Even As Economy Is Weak
1251 GMT - The Bank of England's one-dimensional mandate--focusing solely on keeping inflation close to 2%--has tied its hands as the U.K. economy flatlines, says Singer Capital Markets's Jamie Constable in a note. The BOE left the bank rate unchanged at 4.75% Thursday, but three out of nine policymakers voted to cut rates. This vote possibly suggests some could favor moving away from this single mandate, he says. "Are they now looking to potentially extend their mandate, with three members voting for a cut despite rising inflation?" (emese.bartha@wsj.com)
U.K.'s High Wage Growth Narrows Options for BOE
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December 19, 2024 11:01 ET (16:01 GMT)
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