Instant View: Divided Bank of England cuts rates, pound jumps

LONDON (Reuters) -The Bank of England (BoE) on Thursday lowered UK interest rates by a quarter point, marking its fifth cut in 12 months, although nearly half of its policymakers voted to keep borrowing costs unchanged, giving the pound a boost.

Difficulty reaching an agreement meant the Monetary Policy Committee had to hold two rate votes for the first time in its history.

With the MPC split over how to respond to an inflation rate that the BoE forecasts will soon be double its 2% target and a recent worsening of job losses, Governor Andrew Bailey and four colleagues backed lowering the bank rate to 4% from 4.25%.

MARKET REACTION:

FOREX: The pound was last up 0.4% on the day at $1.3405, having traded around $1.3785 before the decision. The euro fell against sterling to 87.075 pence, down 0.1%.

STOCKS: The FTSE 100 extended losses to trade down 0.7% on the day.

FIXED INCOME: Two-year gilt yields were at 3.887%from 3.844% earlier, up 6 basis points from Wednesday's close.

COMMENTS:

DOMINIC BUNNING, HEAD OF G10 FX STRATEGY, NOMURA, LONDON:

"The language in the statement hints at a few hawkish changes. They talk about policy restrictiveness having already been reduced to some extent.

We've been long euro-sterling for the last couple of months. It's been a good trade and part of that has been the risk of a dovish BoE relative to a more hawkish ECB.

Today's developments probably do put that position into question. It will certainly make us think about our conviction on that one."

PHILIP SHAW, CHIEF ECONOMIST, INVESTEC, LONDON:

"It's not so much the decision to cut rates by 25 basis points that is the main talking point, it's the extent to which the Committee is divided, that resulted in the first re-vote in the MPC's history."

"Essentially the committee collectively is more concerned with the pace of disinflation, and that resulted in less willingness to cut rates across members than we had believed. We are still for now forecasting a 25-bp cut to rates in November, but clearly we could be looking at a another very finely balanced decision and the outturn will of course depend on the data between then and now."

GEORGE BROWN, SENIOR ECONOMIST, SCHRODERS, LONDON

"Today's rate cut is no surprise, but the path forward is anything but clear."

"Jobs, growth and inflation figures all call for different policy prescriptions, as reflected in the unprecedented two rounds of voting needed to reach a majority. Given the uncertainty presented by the conflicting data, the committee is right to stick to its 'gradual and careful' mantra."

"Nervousness about the labour market might prompt another cut in November. But this will be difficult to justify unless disinflation is clearly underway. As such, we think there is a decent chance rates will not fall below the current rate of 4% this year."

JULIUS BENDIKAS, EUROPEAN HEAD OF ECONOMICS AND DYNAMIC ASSET ALLOCATION, MERCER, LONDON:

"The economy remains weak on the back of growing pressure on the government to meet its fiscal rules through a combination of higher taxes and reduced spending, and tariff-related headwinds. The labour market is weak, but inflation and wage growth are elevated. So the Bank faces a dilemma as the former argues for lower interest rates, while the latter doesn’t. Our view is that the Bank will follow today’s cut with further gradual interest rate reductions over the next few quarters."

JEREMY BATSTONE-CARR, STRATEGIST, RAYMOND JAMES INVESTMENT SERVICES, FRANCE:

"The decision to cut rates again was far from unanimous, passing with a razor-edge 5-4 majority. In couching its accompanying commentary, the Bank sent a strong signal on its perception of the trajectories for economic activity and inflation in coming months - and by extension the interest rate pathway. The key takeaway was the Bank maintaining its long-standing 'gradual' and 'careful' wording ... Going forward, further disagreements should be anticipated as member's positions become increasingly entrenched, reflecting the increasing divergence of key data points."

(Reporting by EMEA breaking news team; Compiled by Amanda Cooper; Editing by Lucy Raitano)