Bank of England Holds Steady on Rates, Plans to Shrink Bond Purchases

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Bank of England Holds Steady on Rates, Plans to Shrink Bond Purchases

The Bank of England (BOE) maintained its bank rate at 5.25% on Thursday, September 21, 2023, with a five-to-four vote by the Monetary Policy Committee (MPC). A minority in the committee favored a 25 basis point increase to 5.5%. This decision came in the wake of the US Federal Reserve's choice to continue its pause.

The MPC also unanimously agreed to reduce the stock of U.K. government bond purchases held for monetary policy purposes by £100B over the next 12 months, bringing the total to £658B. The decision was part of a quantitative tightening (QT) strategy.

The central bank observed that the U.K.'s GDP was estimated to have declined by 0.5% in July. However, expectations for GDP to rise slightly in Q3 2023 were also noted.

The MPC stated that monetary policy needs to be "sufficiently restrictive for sufficiently long" to bring inflation down to its goal of 2%. This statement suggests that further tightening in monetary policy would be necessary if there were signs of more persistent inflationary pressures.

Inflation rates showed a downward trend with twelve-month Consumer Price Index (CPI) inflation falling from 7.9% in June to 6.7% in August. The committee projects CPI inflation will return to its 2% target by Q2 2025 if the BOE bank rate averages just under 5.5% for the three-year forecast period.

"CPI inflation is expected to fall significantly further in the near term, reflecting lower annual energy inflation, despite the renewed upward pressure from oil prices, and further declines in food and core goods price inflation," said the MPC.

Following these announcements, the British pound (GBP: USD) fell 0.6% against the U.S. dollar to £0.8148 per dollar. The U.K. 2-year Gilt yield also dropped to 4.62% after reaching nearly 4.70% earlier.

BOE Governor Andrew Bailey, in a letter to the Chancellor of the Exchequer, noted that food price inflation appears to have peaked and core goods inflation seems to be declining. However, external pressures like the ongoing war in Ukraine, which has affected commodity prices, remain elevated.

The MPC is set to review rates again on November 2, 2023.

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