Bank of England Maintains Rates at 15-Year High, Gilts Rally – Reuters

LONDON – The Bank of England has maintained interest rates at a 15-year high, emphasizing its commitment to combatting the highest inflation levels among major developed economies. The current Bank Rate remains at 5.25% for the second consecutive meeting, following a series of 14 rate hikes, as the central bank forecasts indicate that the British economy is teetering on the brink of recession.

Market Reactions:

• Stocks: The UK’s benchmark index retained earlier gains, rising by 1.26%.
• Forex: The British pound increased approximately 0.5% to $1.2208, up from around $1.2193 prior to the BoE’s decision. However, it fell against the euro, which gained 0.37%, trading at 87.31 pence.
• Bonds: The yield on 10-year UK bonds decreased by 16 basis points to 4.33%, following trends from earlier in the day.
• Money Markets: Markets have fully accounted for a potential 25 basis point cut in the Bank Rate by August 2024, down from an earlier perceived probability of about 80%.

Expert Commentary:

Geoff Yu, Senior EMEA Market Strategist at BNY Mellon, London: He indicated that the Bank of England is likely adhering to its expected trajectory, albeit with some frustration over the pace. A critical takeaway from the Monetary Policy Report is the acknowledgment that the adjustment of domestic prices and wages will take longer than their rise.

Althea Spinozzi, Senior Fixed Income Strategist at Saxo Bank, Copenhagen: She noted that the projections suggest a stagflation scenario, predicting that the next action will lean towards cutting the base rate. However, she cautioned that inflation is unlikely to stabilize at target levels until 2025, maintaining vulnerability in the long end of the yield curve.

Ed Hutchings, Head of Rates at Aviva Investors, London: He stated that while the BoE has not changed rates and markets are pricing in significant cuts for 2024, the central bank appears to be cautious about over-exuberance in rate cut expectations. He highlighted that the lagged effects of previous hikes are still influencing economic performance, creating uncertainty for gilt yields.

Dario Perkins, Managing Director of Global Macro at TS Lombard, London: He remarked that most central banks are eager to halt rate tightening. While some have begun easing, he suggested that the Bank of England’s position may be less secure than the Federal Reserve’s or the European Central Bank’s.

Samuel Zief, Head of Global FX Strategy at JPMorgan Private Bank, London: He mentioned that the BoE signaled that additional tightening requires new evidence of persistent inflation, which has not materialized. He anticipates the next move will be a rate decrease, based on BoE forecasts pointing to inflation returning to target levels by 2025.

Chris Beauchamp, Chief Market Analyst at IG Group, London: He indicated a shift in tone similar to that of the Fed, highlighting that the 6-3 voting outcome reflects growing caution among central banks outside the U.S. He noted that while rate cuts may not be imminent, the likelihood of further hikes seems diminished.

Michael Field, Senior Equity Strategist at Morningstar, Amsterdam: He acknowledged that while this decision may provide some relief to the markets, overall optimism has been overshadowed by positive developments from the Federal Reserve. He emphasized that current rates remain at their highest since before the financial crisis.

Peter Doherty, Director of Investment Research at Arbuthnot Latham, London: He suggested that the Bank of England faces significant challenges, as economic data cools while inflation remains persistently high. He noted that the BoE’s relative ability to hike rates compared to the Federal Reserve could exert downward pressure on the pound against the dollar.

Georgina Taylor, Fund Manager and Head of Multi-Asset Strategies at Invesco, London: She predicted that given the peak rates, the Bank of England may need to be the first major central bank to initiate rate cuts, especially considering the deteriorating economic conditions. She expressed a favorable outlook on bond markets, suggesting that gilts present a significant value opportunity.