Bank of England base rate hold

Commenting on today’s Bank of England base rate hold, Chris Arcari, Head of Capital Markets, Hymans Robertson says:

“The Bank of England’s (BoE) decision to hold rates at 4.0% pa doesn’t come as a surprise for markets, especially following yesterday’s inflation print of 3.8% for August. The BoE remains caught between two competing forces: inflation that’s easing but still elevated, and growth that’s tepid at best. While headline CPI has come down, services inflation and wage growth remain sticky, complicating the path to rate cuts. The market continues to price in one final 0.25% pa cut this cycle, potentially taking the bank rate to 3.75% pa. With inflation progress stalling and the economy showing only modest momentum, the Bank faces a difficult balancing act: ease too soon and risk reigniting price pressures; hold too long and risk choking off recovery.

"The more interesting element of today’s meeting is the bank’s decision on whether to reduce the pace at which it is reducing its stock of gilt purchases. The BoE is letting its holding of gilts run down, a process known as quantitative tightening, through a combination of naturally letting gilts mature and, unlike other major central banks, actively selling gilts. The Bank is currently reducing its stock of gilts at a pace of £100bn a year, with the balance of gilts not naturally maturing in any year being made up for with sales of bonds into the market. Economists expect the Bank to reduce the pace of balance sheet reduction to around £72bn per annum. Reducing the proportion of gilts sold into the market should reduce the upwards pressure on long-term yields as these sales currently compete with Gilt sales from the DMO. However, risks in the near-term around this announcement are two sided: disappoint on the scale of reduction and yields might rise. Do more than the market expect and yields might fall." 

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