Pound hits highest since March 2022 after UK interest rates are held at 5% – business live

Suren Thiru, economics director at Chartered Accountants’ group ICAEW, fears the Bank of England will be “painfully cautious” with rate cuts in coming months, having left interest rates on hold today.

“Keeping interest rates unchanged will be a notable setback to households contending with burdensome mortgage bills and businesses grappling with a variety of other cost pressures.

“While this decision doesn’t mean the end of the rate-cutting cycle, it does suggest that the pace of policy loosening is likely to be painfully cautious, with rate setters still concerned that underlying inflation remains too high.

“Although only one rate-setter voted to loosen policy, the relatively dovish tone of the minutes suggest that the Monetary Policy Committee is shifting towards cutting interest rates when it next meets in November.

“Continuing to keep interest rates elevated risks hampering the government’s ambition of significantly higher annual GDP growth by keeping borrowing costs too high for too long, limiting investment and growth opportunities for businesses.”

James Sproule, UK chief economist at Handelsbanken says yesterday’s inflation report was “undoubtedly key” to today’s decision.

While the August inflation rate overall held steady at 2.3%, services inflation rose from 5.7% to 5.9%, largely driven by earnings. Longer term the outlook is that the overall 2% inflation target can be sustainably maintained so long as goods inflation is around -1%, while services inflation sits at around 3%.

For the moment goods inflation is negative at -0.9%, although longer term as and when supply chains are rebalanced away from China, maintaining that negative price trend may prove a challenge. As to services inflation and earnings, there is an ongoing concern that above inflation (and well above productivity growth) pay rises being agreed by the new Government for a range of public sector workers could spill over into pay expectations in the private sector. Such an outcome would undoubtedly prompt the MPC to slow, or stop, its path of interest rate reductions.

Janet Mui, head of market analysis at wealth manager RBC Brewin Dolphin, says the Bank. has a “trickier” inflation challenge than its counterparts in the US and the eurozone:

After the Federal Reserve cut rates by 0.5% yesterday and the ECB cut rates a second time this month, the contrast is stark as the BoE holds. Arguably the UK sees a trickier inflation environment, as services inflation and wage growth remain above 5% YoY. Near-term economic momentum has improved in the UK, whereas in the US it has slowed.

Broadly speaking, as the factors driving inflation higher have been normalising, inflation is still expected to slow toward 2%. So, it is fair to expect that the BoE will be able to keep cutting rates over the course of the next 12-18 months, but at a gradual and modest pace. The next cut is largely expected to be November, needless to say, the BoE will remain data dependent.”

Alpesh Paleja, interim deputy chief economist at the CBI, says the Bank is walking a ‘fine line’:

“The Monetary Policy Committee was widely expected to hold fire this month, after the first rate cut in four years in August. There remain very varied views among the MPC around the degree of inflation persistence, and over what horizon this will dissipate.

Monetary policy will be walking a fine line for a little while yet: between balancing upside risks to inflation, but not being too tight, so as to choke off activity. Developments in fiscal policy in October’s Budget will also be a key consideration for growth prospects.

We still anticipate another rate cut in November, and a few more next year, in line with the MPC moving at a slow but steady pace. On their own, lower interest rates will be a welcome respite to households and businesses.”

The Bank of England’s reluctance to cut interest rates today is a blow to borrowers, such as mortgage-holders and credit card customers. Savers, though, will benefit.

Alice Haine, personal finance analyst at online investment platform Bestinvest by Evelyn Partners, says keeping interest rates on pause at 5% may be unsettling for households, particularly with a painful budget looming.

Haine writes:

“Many households, who have seen their finances battered by high living and borrowing costs over the past few years, are likely to have pinned their hopes on another rate cut, particularly those still contending with high mortgage and debt repayments. While the 25 basis-point cut on August 1 will have slightly eased the strain for borrowers – another cut would have cemented that sense of relief.

“The worst of the cost-of-living crisis may now be behind us, but the rapid price rises of the past few years are now baked in, so making ends meet remains a struggle for some. While food inflation is continuing to ease, rents, airfares and transport costs rose in August – indicating that the inflation pain of the past few years is not over just yet.

“With high living and borrowing costs over a sustained period leaving consumer finances under strain, some households have been forced to delay major purchases, such as a first or bigger home. Others have relied on credit to make ends meet, putting them at the mercy of the high interest charges on that debt.

But those with money in savings accounts will benefit, for the moment anyway, says Mark Hicks, head of active savings at Hargreaves Lansdown:

“The decision to hold interest rates steady at 5% is good news for savers. Banks and building societies had started to price in the possibility of a cut over the past few days, and if this had materialised, we would have seen others swiftly follow suit.

However, this good news is unlikely to last. Further cuts later this year are likely to hit the easy access market the most, because those rates remain the most sensitive to the base rate. Fixed rates are still the best option for anyone who doesn’t need the money close at hand. They offer similar rates to the easy access market, and mean savers can lock in these rates for the entire fixed period. As the downward trend in global interest rates is well under way, it will now become a question of how far rates will fall – and at the moment, the end isn’t in sight anytime soon.”

The odds of a cut to UK interest rates in November have fallen, following the cautious comments from BoE governor Andrew Bailey.

The money markets now indicates that a November rate cut is only a 60% chance.

Before noon, it was fully priced in, so that’s quite a change.

Why? Two factors, I think.

Firstly, the fact the MPC split 8-1 to leave interests rates on hold, while economists had expected a 7-2 split.

Second, Bailey’s comments about being careful “not to cut too fast or by too much”.

The pound has jumped to its highest level against the US dollar in two and a half years, following today’s interest rate decision.

Sterling jumped by almost a cent to $1.331, its highest level since March 2022.

The rally shows the divergence between monetary policy in the UK compared to the US, following last night’s rate cut.

Luke Bartholomew, deputy chief economist at abrdn, explains:

Clearly, the Bank’s relative caution stands in some contrast to the Fed’s strong start to its easing cycle, with a 50bps cut yesterday. This difference in policy partly reflects different mandates of the two central banks, but also the different growth and inflation outlook. Underlying inflation pressures in the UK remains elevated, while the labour market is sending quite mixed messages about the health of the economy. This divergence should help support the pound for now.

But attention in UK markets may increasingly shift away from monetary policy and towards fiscal policy as we approach the Budget at the end of October. Certainly, the Bank will need to incorporate any fiscal changes in its next forecasts, which could provide the foundation for more rapid cuts in due course.”

Governor Andrew Bailey has said the Bank needs to “be careful” not to lower interest rates too quickly, or by too much.

A day after his US counterpart boldly announced a whopping half-point reduction in interest rates, Bailey sounds decidely more cautious.

In a statement, he says inflationary pressures were easing and that the economy was evolving “broadly as we expected”.

Bailey explains:

“If that continues, we should be able to reduce rates gradually over time.

“But it’s vital that inflation stays low, so we need to be careful not to cut too fast or by too much.”

The minutes of this week’s meeting show that members of the MPC took “different views on the probabilities and risks” facing the economy, which suggests it was a lively meeting.

The Bank explains:

Eight members preferred to maintain Bank Rate at 5% at this meeting. Wage and price-setting had continued to normalise and UK activity growth had been broadly in line with expectations, although there was some greater uncertainty around the near-term global outlook.

There was a range of views among these members on the degree to which the unwinding of past global shocks, the normalisation in inflation expectations and the current restrictive policy stance would lead underlying domestic inflationary pressures to continue to unwind, or whether these pressures could prove more entrenched, possibly as a result of more structural factors or greater momentum in demand.

Despite these differences of view, the current policy stance was judged to be appropriate. For most members, in the absence of material developments, a gradual approach to removing policy restraint would be warranted.

But Swati Dhingra argued that rates should be cut now, to allow a “smooth and gradual transition in the policy stance”.

The decision was not unanimous – the Bank’s policymakers was split 8–1 to maintain Bank Rate at 5%.

Swati Dhingra, the most dovish member of the committee, voted against the move and wanted to cut rates to 4.75%.

But, the other eight members – Andrew Bailey, Sarah Breeden, Megan Greene, Clare Lombardelli, Catherine L Mann, Huw Pill, Dave Ramsden and Alan Taylor – all voted to hold rates unchanged.

Newsflash: The Bank of England has left UK interest rates on hold.

At its latest meeting, the Bank’s Monetary Policy Committee voted to leave interest rates at 5%, resisting any temptation to cut rates for the second meeting running.

The vote means no fresh relief for borrowers (even as defaults on direct debits rise), a day after the US central bank cut its rates for the first time in four years.

The decision comes a day after UK inflation stuck at 2.2% in August, above the Bank’s 2% target, with a rise in both core inflation and services inflation.

More to follow…

Stocks are pushing higher in London, as last night’s US interest rate cut continues to cheer investors.

The FTSE 100 is now up 109 points, or 1.3% to 8363 points, the highest in over two weeks.

Shares are rallying across Europe too – Germany’s DAX has just hit a new alltime high.

Markets are seeing yesterday’s half-point cut to US rates as a positive, says Russ Mould, investment director at AJ Bell:

“Central banks have a reputation of moving at a snail’s pace, spending too long analysing data and subsequently playing catch-up with their monetary policy decisions.

It feels as if the Federal Reserve has had enough of this criticism and wants to be seen in a different light. A half-percentage point interest rate cut is certainly not messing around and shows it is serious about getting ahead of events and not being behind the curve.”

“The tone of the Fed’s comments makes this cut feel like a calm and collected decision, not one of panic. That’s reassuring for the markets as there was a danger that such a big rate cut could send the wrong message. However, there is a lot to digest and it’s understandable the market reaction was initially mixed.

US indices went up on the news, then pulled back and stayed flat, and now futures prices imply another leg up when Wall Street opens on Thursday.

Tension is rising in the City, with just 30 minutes until the Bank of England announces its decision on interest rates.

Anything other than a ‘no change’ decision would be a surprise, of course.

Joshua Mahony, analyst at Scope Markets, says the BoE appears unlikely to ease for a second consecutive meeting:

Coming off the back of a 25-basis point move that took UK rates down to 5%, we instead have to look ahead to November for the next cut according to market expectations.

The inflation report released yesterday highlighted exactly why the bank will likely take a cautious approach to easing, with core CPI spiking up to a four-month high of 3.6%.

Services price pressures remain a bugbear of the BoE, and we are seeing precious few signs that we will see any tangible shift towards target for core inflation this year. Nonetheless, with headline CPI at 2.2%, the BoE doe have the basis for further easing, and there is a view that the bank will cut by 25-basis points from November onwards.