AgFin Australia

Bank of England holds rates at 5%, despite speculation of cut

As expected, the Bank of England held rates steady at 5% during its meeting on Thursday, despite some enthusiastic traders attempting to promote the idea of a rate cut following the Federal Reserve’s half a per cent reduction the day before.

The Bank of England had already cut rates once last month by a quarter of a per cent, and the vote of 8 to 1 on its Monetary Policy Committee (MPC) to hold rates (with one member favouring a 0.25% cut) was widely anticipated.

A “gradual approach” to monetary easing remained appropriate, with services inflation staying “elevated,” according to the MPC.

The Bank of England is one cut behind the European Central Bank, which has reduced its key rate by a total of half a per cent.

The UK economy, which has emerged from recession but recorded sluggish growth this year, is expected to return to an underlying pace of around 0.3% growth per quarter in the second half, the MPC added.

Headline inflation is close to its 2% target, but price increases in services — which account for around 80% of the UK economy — rose by an annual 5.6% in August. Wage growth has cooled to a more than two-year low over the three months to July, but remained relatively high at 5.1%.

The decision had no significant impact on stock markets in Europe or the UK, which had started the day strongly after the Federal Reserve’s substantial cut the day before and a strong early start by Wall Street futures traders.

By the close, the Stoxx 600 European market index had gained a solid 1.45%, and London’s FTSE closed up 0.9%. Economists now expect the Bank of England to cut its key rate in November.