BOE cuts rates 25 bps: FTSE 100 higher, GBP drops

The Bank of England has cut rates by 25 basis points. The call was pretty close, with a 61% chance of a 25bps cut priced in just moments before the decision was announced. The vote split of 5-4 shows how close it was, even for the MPC members. Members Pill, Greene, Mann and Haskel voted to keep unchanged at 5.25%. Their justification is that inflation persistence has not yet dissipated. 

The statement accompanying the decision highlights how finely balanced the decision was. The comment about how “The risks of higher inflation remain. We need to make sure inflation stays low. So, we have to be careful not to cut interest rates too much or too quickly.” stands out as it offers some caution within the cutting cycle. Like the ECB, the BOE does not want to set a pre-determined rate path, opting to keep further decisions data dependent.

With regards to economic projections, the central bank has revised higher the inflation projections for the remainder of 2024 and the first half of 2025 but has revised lower the longer-term forecasts. The bank also expects the economy to start slacking as GDP growth slows and unemployment rises. This, coupled with the risk of inflationary pressures from second-round effects, is what the central bank will continue to monitor closely in order to avoid a stagnant economy. 

For now, markets are pricing in a 50-50 chance of another cut in September, but it’s likely that we see a big more caution priced in over the coming days as more data evolves. The messaging from the BOE seems pretty clear with regards to wanting to avoid cutting too quickly, so like the ECB they may take a breather for one meeting before potentially cutting again. Therefore, a November cut is looking like a safer bet, but markets will have to wait and see how the UK CPI, GDP and jobs data comes in over the coming weeks. For the remainder of 2024, current pricing shows 40 bps of cutting.

UK assets had been struggling to find momentum heading into the meeting but the decision to cut rates has given a mixed reaction, as expected. The FTSE 100 welcomed the easing of policy with the recent bullish drive gaining further momentum as it improves the future earnings potential for UK companies. In the meantime, the British pound and UK yields dropped following the decision, as the rate differential plays against them, especially when compared to the US dollar as the Federal Reserve kept rates unchanged on Wednesday. 

GBP/USD 1-hour chart

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FTSE 100 1-hour chart

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