Market Data 
LONDON (Reuters) -The Bank of England cut interest rates from a 16-year high on Thursday after a narrow vote in favour from policymakers divided over whether inflation pressures had eased sufficiently, which initially dented the pound.
Thursday’s decision was in line with the forecast in a Reuters poll of economists but financial markets had only seen just over a 60% chance of a cut.
Governor Andrew Bailey – who led the 5-4 decision to lower rates by a quarter-point to 5% – said the BoE’s Monetary Policy Committee would move cautiously going forward.
“We need to make sure make sure inflation stays low, and be careful not to cut interest rates too quickly or by too much,” he said in a statement alongside the decision.
MARKET REACTION:
STOCKS: The domestically focussed midcap index gained 0.3%%, having hit its highest in over two years. The blue chip index pared gains, trading unchanged on the day.
FOREX: Sterling fell to a session low of $1.2752 immediately after the decision, before reversing some of those losses to trade at $1.2787, down 0.54% on the day. It also pared some of its losses against the euro, which was up 0.23% at 84.39 pence, off a session high of 84.57.
BONDS: Benchmark 10-year gilt yields were last down 3.9 basis points on the day at 3.936%, unchanged compared to before the decision. Two-year gilt yields, which are more sensitive to shifts in monetary policy, were down 5 bps at 3.762%, around 15-month lows.
COMMENTS:
LAURA FOLL, UK EQUITIES MANAGER, JANUS HENDERSON, LONDON:
“The market was struggling to price ahead this decision because of the absence of smoke signals from Threadneedle Street during the election campaign. But there was a growing consensus in the City over the past couple of days that a cut was coming.
The Bank of England is still being cautious – it was a close decision and the message is clear – don’t expect rate cuts at every meeting. But peak interest rates are, for now, behind us. And that might be sufficient to nudge consumers sitting on savings to stop postponing those big decisions on house moves, renovations and big-ticket spending.”
HARRY RICHARDS, PORTFOLIO MANAGER, FIXED INCOME, JUPITER ASSET MANAGEMENT, LONDON:
“The BoE is entirely justified in starting to cut rates now. The economy has evolved to such an extent that the level of extreme monetary policy was simply no longer required and, instead, dialling-back the degree of restrictiveness makes ample sense. In our view, the BOE should loosen policy much more aggressively as we move into 2025 so as to avoid doing irreparable harm to the labour market and risk sparking the hard landing concerns once more.”
“On the more positive side, the election result has delivered an air of relative political stability to the UK which we believe may entice international investors to look favourably upon UK fixed income markets. Importantly, however, the new government’s recent acknowledgement that taxes will need to rise is likely to act as a further brake on economic growth, increasing the pressure on the BoE to lower rates in the medium term.”
PHILIP SHAW, CHIEF ECONOMIST, INVESTEC, LONDON:
“The bigger picture is the MPC feels sufficiently relaxed about the risk of inflation persistence to cut the bank rate for the first time in over four years.
The various signs of loosening in the labour market appear to be a big factor in the decision today and that’s outweighed the recent stuff on services inflation, which held at 5.7% in June.
The question is where do we go now? We do think MPC will bring rates down again this year. The common thread with central banks is the Committee is in data-dependent mode and I think we’re going to see that phrase uttered a lot, not just in the UK but in other developed markets.”
COLIN ASHER, ECONOMIST, MIZUHO, LONDON:
“If you look at the headlines that Bailey produced: caution on cutting too quickly or by too much, it implies to me that they’re looking at a steady quarterly pace of reductions. So I would probably expect the next cut to come in November, assuming that the macro economic developments unfold as they expect.”
“Generally speaking, I would expect sterling to gradually strengthen. I think you might be able to term this a hawkish cut, as in, you have guidance from Bailey suggesting not to go too far or too fast. And then in contrast from (Chair Jerome) Powell, you have the Federal Reserve looking reasonably dovish and to me that suggests upside for sterling in the medium term.”
DANIELE ANTONUCCI, CHIEF INVESTMENT OFFICER, QUINTET PRIVATE BANK, LUXEMBOURG:
“Keeping rates too high for too long would have caused unwarranted economic weakness and therefore, an undershoot of the Bank’s inflation mandate to the downside.
Even though it makes sense to proceed at a moderate pace, beginning to soften the degree of monetary tightening looks like the most sensible approach.
We’ve increased our exposure to short-dated gilts. This is because short-dated bonds are most sensitive to central bank rate changes.
With the Bank of England having just cut rates and likely to continue to do so, one-to-three-year gilts could benefit.”
DEAN TURNER, CHIEF EUROZONE AND UK ECONOMIST, UBS GLOBAL WEALTH MANAGEMENT, LONDON:
“In our view, further easing is likely in the coming months as the disinflationary trends continue into the new year. The prospect of lower interest rates should continue to favour taking exposure to high-quality corporate and government bonds.”
“As for sterling, it has struggled to build on its recent gains, but we see potential for upward momentum to resume when the Fed joins the interest-cutting cycle, which we expect it to do when it meets in September.”
JEREMY BATSTONE-CARR, STRATEGIST, RAYMOND JAMES, FRANCE:
“The UK’s economic performance has been stronger than expected in recent months, moving past the residual effects of earlier inflation and providing an economic boost for the newly installed Labour government.
However, real interest rates remain high and there has been a stronger-than-expected strengthening in demand over potential supply constraints, notably in the labour market. Despite this, the Committee has taken a leap of faith in cutting rates, hoping to stimulate consumers with lower borrowing costs and increased spending power.”
NEIL BIRRELL, CHIEF INVESTMENT OFFICER, PREMIER MITON INVESTORS, LONDON:
“Falling UK interest rates have arrived at last. The Bank of England has moved from worrying about inflation to worrying about economic growth, although they are bound to be cautious about further cuts and can’t lead the bond market to expect too much too soon.
But, it is an important move, with only the U.S. not joining the global rate cutting party to date. We could see financial markets further reflect the turn in the cycle, at aggregate level, but probably more so within asset classes.”
JASON SIMPSON, SENIOR FIXED INCOME STRATEGIST, STATE STREET, LONDON:
“If there’s a perception of fiscal loosening then the market will see a lot more gilt supply coming into the market that has to be absorbed and a bit of an inflationary impact so that shine on gilts might fade.”
JULIUS BENDIKAS, EUROPEAN HEAD OF ECONOMICS AND DYNAMIC ASSET ALLOCATION, MERCER, LONDON:
“We viewed this decision as a surprise, especially given elevated wage growth. Having said that, we expect 1 to 2 more rate cuts in 2024 with more to come in 2025. The economy has normalised, so should the interest rates.”
MICHAEL BROWN, MARKET STRATEGIST, PEPPERSTONE, LONDON:
“Looking ahead, a relatively gradual quarterly pace of cuts seems most plausible for the (Bank of England), with further normalisation likely to coincide with meetings at which a Monetary Policy Report is published, leaving the base case as just one more cut this year, at the November meeting. Such a pace would be broadly in line with that priced by markets, and that likely to be delivered by other G10 central banks, potentially limiting any prolonged sterling downside on the back of today’s decision.”
