Bank of England leaves interest rates on hold

The Bank of England left the cost of borrowing unchanged at 5% on Thursday, as widely expected, but hinted at further cuts to come.

The Monetary Policy Committee, which cut interest rates for the first time in four years in August by 25 basis points, opted to leave them unchanged by a majority of 8 to 1.

External member Swati Dhingra voted for another 25bps cut, to 4.75%.

The MPC also voted unanimously to reduce the stock of UK government bond purchases by £100bn over the next 12 months, also as widely expected.

GDP growth has stalled recently, with the economy stagnating for the second consecutive month in July. Analysts had been expecting in a 0.2% uplift.

But data on Wednesday showed the consumer price index held steady at 2.2% in August, above the BoE’s 2% target, while core inflation and services inflation both accelerated.

The MPC did not rule out further rates, but signalled a gradual approach to reducing the cost of borrowing.

It said monetary policy decisions were guided by a need to “squeeze persistent inflationary pressures out of the system” and return inflation to target in a “timely manner and on a lasting basis”.

It continued: “Since the MPC’s previous meeting, global activity growth has continued at a steady pace, although some data outturns suggest greater uncertainty around the near-term outlook.

“In the absence of material developments, a gradual approach to removing policy restraint remains appropriate.”

Andrew Bailey, BoE governor, said the economy was moving “broadly as we expected”.

“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.”

On Wednesday, the US Federal Reserve announced its first cut in more than four years, trimming its benchmark interest rate by 50bps. It also signalled that more reductions would follow.

Paul Dales, chief UK economist at Capital Economics, said: “By leaving interest rates at 5%, the BoE showed it is more like the European Central Bank than the Fed, and is cutting rates gradually rather than rapidly.

"We expect only one further 25bps cut this year, at the next meeting in November, although the pace of cuts may quicken next year.”

Matt Swannell, chief economic advisor to the EY Item Club, said: “September's decision [is] a skip, rather than a pause, in the rate-cutting cycle.

“Having delivered its first cut in August, the BoE made clear that it would adjust policy gradually and would guard against doing too much, too quickly. But the minutes make it clear that the November meeting remains live, with the MPC identifying it as the right time to update its assessment of the economic outlook.”

The EY Item Club is forecasting a 25bps cut in November.