Bank of England has opted for the first rate cut after a very restrictive policy. The pound is falling, but not collapsing. What to expect in the future?
The Bank of England opted for a 25 basis point rate cut at its meeting on August 1, the first move in this direction since the start of 2020.
The Bank of England also announced further cautious reductions going forward, offering some relief to households after a year of some of the UK’s highest borrowing costs for a generation.
Governor Andrew Bailey’s deciding vote saw the benchmark drop by a quarter of a point, now at 5%. The decision was “balanced” for some of those supporting the move and opposed by a four-member minority of the nine-member Monetary Policy Committee, according to meeting minutes.
The pound posted losses against the dollar and UK stocks contributed to earlier gains following the decision.
Bank of England rate cut, is it just the beginning?
After falling to a multi-week low at 1.2750 on the Bank of England’s (BoE) decision to cut the key rate by 25 basis points, the GBP/USD pair recovers towards 1.2800 Thursday. BoE Governor Bailey’s cautious comments on further monetary policy easing appear to be helping the pound find support.
The decision to reduce the cost of money was taken after inflation returned to the 2% target set by the bank in May and remained at this level also in June, despite service prices remaining stubbornly high.
In announcing the move, BoE governor Andrew Bailey warned that he would not anticipate what to expect in the future, effectively ruling out a rapid succession of further cuts.
“ inflationary pressures have eased to the point that we were able to cut interest rates today. But we need to make sure inflation stays low and be careful not to cut interest rates too quickly,” he said.
The rate cut will come as a welcome relief to borrowers and businesses after 12 months in which rates remained stuck at their highest level in 16 years and will give the new government a head start.
What to expect from the Bank of England now?
Ruth Gregory of Capital Economics said Thursday’s decision was an “aggressive cut,” given the close vote and Bailey’s cautious message. “It seems likely that the MPC will want to see more evidence of easing inflationary pressures before undertaking further rate cuts”, he added.
According to what Kallum Pickering, chief economist at Peel Hunt, told CNBC, the next rate cut by the Bank of England will probably not happen before November.
“My hunch is that the Bank of England will want to do what the ECB is doing and prepare the markets for a cut, then a pause, and then a cut and then a pause and so it won’t be before November that I think we’re going to get another cut,” he said.
Athanasios Vamvakidis, head of G-10 FX strategy at Bank of America highlighted: “I see limited impact on the pound. They are not committing to anything. They will move forward meeting after meeting, remaining dependent on the data.”
“It appears both stock analysts and the MPC were conflicted about the need for a rate cut today”, said Seema Shah, head of global strategy at Principal Asset Management.
“The Bank has adopted an aggressive cut, giving little signs of consecutive rate cuts.”
Like the ECB and the Fed, BoE also seems to prefer a prudent approach on future moves. The context is so changing that predicting the timing of further cuts is not appropriate.
Original article published on Money.it Italy 2024-08-01 15:10:20. Original title: Bank of England, c’è la svolta con il taglio dei tassi. Sterlina in calo
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