On Thursday (September 19th), the Bank of England made no changes, choosing to keep the policy rate unchanged at 5.00%, and maintaining the pace of balance sheet reduction at 100 billion British pounds per year; this is in line with our and the majority of economists' forecasts (even after the significant rate cuts by the Federal Reserve). The central bank's decision statement did not have significant changes, adhering to limited forward guidance and providing a subdued update on recent developments in the economy. We expect the Bank of England to cut interest rates by 25 basis points at the November and December meetings, followed by a total reduction of 125 basis points in 2025, with a rate cut roughly every quarter, reaching 3.25%.

Contrary to the betting in the market, there was no rate cut, and there was a slightly hawkish 8-1 voting split, with no real agreement on a rate cut in November, and no change in the balance sheet reduction plan. These factors combined to keep UK bonds flat, and the British pound only briefly strengthened. The market is keenly focused on the potential change in the pace of the Bank of England's Quantitative Tightening (QT), as larger deleveraging targets could involve larger-scale sales of UK bonds (rather than passive rolling). If this is the case, it could lead to a more balanced performance between short and long-term yields of UK bonds.

As of the time of writing this article (8:15 Eastern Time), the 2-year UK Treasury notes yield has increased by 6 basis points, and the 10-year UK Treasury notes yield has increased by 4 basis points - please note that during this period, the U.S. 2-year Treasury notes yield remained relatively flat, while the 10-year Treasury notes yield increased by 2 basis points. The pricing for the November meeting is approximately 27 basis points for implied rate cuts, and a total of 43 basis points by December, representing a 7 basis point reduction in priced-in rate cuts. We believe this is somewhat too diminished in terms of rate cut expectations, but it may reflect the market's view that the Bank of England will proceed with greater caution. The British pound briefly rose, but is currently hovering around the 1.33 level due to the pre-announced 0.6% increase on the day.

In short, according to the statement, "it is still appropriate to gradually remove policy restrictions in the absence of substantive progress". Since the Bank of England's 25 basis point rate cut on August 1st, the evolution of two CPIs and two employment/wage reports (among other reports) has been relatively consistent with the forecasts in the Monetary Policy Report released last month. Services inflation was slightly lower than expected, but not significantly, "remaining high at 5.6% in August", while wage growth excluding bonuses remained high at 5.4% and 5.1% in June and July, respectively. UK GDP unexpectedly did not grow in July, but this was not enough to offset the positive momentum in the UK economy, which is better than expected in 2024.

In the August decision, the 5-4 voting result showed a strong division - it is worth noting that Chief Economist Pill leaned towards no change - the threshold for consecutive rate cuts today was high, as the Bank of England's Monetary Policy Report last month stated that they "must be careful not to cut rates too much or too quickly", which Governor Bailey reiterated to the BBC today. Our interpretation of the August decision is that the Bank of England will conduct an evaluation every quarter on the occasion of the Monetary Policy Report release, similar to the European Central Bank (which lowered rates in October in line with a new round of forecasts).

The 8-1 voting result today may be more hawkish than some expected, as Deputy Governor Ramsden was expected to vote alongside dovish leader Haldane. It is not surprising that the latter voted in favor of more accommodative policies today (she has been hoping for a rate cut since February), so to some extent, this morning's decision is a very strong consensus. We will not read too much into the split in votes for its impact on the announcement in November. By then, we should have stronger evidence to suggest that inflationary pressures (such as wage and GDP growth significantly exceeding expectations) have not materialized and that policy needs to be relaxed to avoid the risk of too-low inflation for the Bank of England in a situation of far below trend growth.