BoE remains on hold for now
The Bank of England MPC voted 6-3 to keep interest rates unchanged at 3.75%, as broadly expected, though a number of those members who opted to stay on hold yesterday indicated they may support a hike fairly soon. The market is currently pricing in a circa 85% chance of a quarter-point increase at the next meeting in November and expects some 100bps of hikes in total by around the middle of next year. Sterling is actually a touch weaker following the rate announcement, trading at just under £0.86 against the euro and at $1.3365 versus the dollar. EURUSD is not much changed from yesterday morning’s levels at about $1.1485. Overnight, the Bank of Japan voted 7-2 to raise its policy rate by 25bps to the lofty heights of 1.25%, with the two dissenters voting to keep policy on hold. The yen has lost more ground against the dollar following the decision, falling to over Y157, and is now down some 2% from last week’s highs.
US government bonds rallied quite strongly yesterday, in the aftermath of the Fed’s rate hike on Wednesday, with yields falling by 8-10bps across the curve. The benchmark 10-year yield is now below 4.95%, down from its recent highs of almost 5.05%. Short-dated UK bond yields ended little changed following yesterday’s BoE rate decision, but long-end yields fell by 8-12bps after the BoE announced a pause in bond sales (as part of its ‘quantitative tightening’ – QT – programme) until April next year as well as a reduction in the amount of long-dated bonds it will sell to the market. Elsewhere, German yields were marginally flat to lower on the day. In equity markets, meanwhile, US stocks staged a decent rebound after recent losses, with the S&P 500 gaining just over 1%, while European stocks advanced for a second day running, adding around 1%.
In its latest monetary policy statement, the Bank of England MPC noted that “there has been little evidence so far of material second-round effects in price and wage-setting” from the energy price shock. However, it warned that the “risk of such effects…is greater the longer higher energy prices persist” – and all the more so now as headline inflation expected to rise to over 4% over the coming months – with a number of those MPC members that voted to keep policy on hold yesterday indicating they may support a rate hike in the near-term.
Some more solid economic data out of the UK this morning, this time retail sales for August. They show spending volumes rose by a stronger than expected 0.5% on the month, while over the three months to August, spending was up almost 1% on the three months to May and almost 2.5% higher than in June-August 2025.
For the day ahead, economic data due include construction output and the ECB’s latest survey of consumer inflation expectations in the Euro area, and industrial production/manufacturing output in the US, while European finance ministers and central bank heads hold an informal meeting in Dublin (with plenty to discuss obviously).