Bank of England Maintains Interest Rates Amid Narrow Vote, Pound Declines

Bank of England's Rate Decision and Market Reactions

LONDON, Feb 5 (Reuters) - The Bank of England kept interest rates on hold on Thursday, but only after an unexpectedly narrow 5-4 vote, and it said it expected a future cut if a sharp fall in inflation due in the coming months proved not to be a blip.

Sterling fell after the decision and was last trading down 0.6% on the day at $1.357, while British government bond yields fell sharply as traders ramped up rate-cut expectations. 

London's FTSE-100 stock index was down 0.4%. 

Market Impact on Sterling and Bonds

COMMENTS: 

Analysts' Insights on Future Rate Cuts

ELIAS HADDAD,  SENIOR MARKETS STRATEGIST, BROWN BROTHERS HARRIMAN, LONDON

“They have tweaked the cautious easing guidance by scrapping reference to a gradual downward path of the bank rate.”

“The BoE has also slashed the inflation forecast and raised the unemployment projection, so also here pointing to more easing in the pipeline.”

“UK yields could correct at the short end of the curve as expectations adjust to imply more rate cuts and that should lead to further weakness in the pound.”

LUKE BARTHOLOMEW, DEPUTY CHIEF ECONOMIST, ABERDEEN, LONDON:

"It was no surprise that the Bank of England opted to keep interest rates unchanged today. But the decision was much closer than expected, with a solid dovish minority that will likely continue to push for further rate cuts in months ahead. So Governor Bailey is set to remain the swing vote in determining the path of policy.

"As long as inflation moderates further over coming months, we continue to expect he will swing behind further cuts in the not too distant future."

TODD CUTTING, SENIOR PORTFOLIO MANAGER AT AVIVA INVESTORS, LONDON:

"With the MPC decision now out, the initial market read will likely focus on how firmly the committee has chosen to lean against the recent softening in labour‑market data. Despite clearer signs of cooling in hiring and pay, today’s communication suggests that the bar for easing remains higher than the data alone might imply. The message is one of cautious discipline: acknowledging softness, but signalling that it is not yet soft enough to shift the policy stance."

KIRSTINE KUNDBY-NIELSEN, ANALYST, DANSKE BANK, COPENHAGEN:

"The vote split is a lot more dovish than expected. It's what markets are reacting to. They are signalling that on the basis of the current evidence, the bank rate is likely to be reduced further. It sounds very much like a question of when, not if.

"I think it will be pretty tight whether it will be a March or April cut, but I think the point is that, prior to this it was priced that we would see only one more cut, but now two could definitely be in play."

MADISON FALLER, GLOBAL INVESTMENT STRATEGIST J.P. MORGAN PRIVATE BANK:

"With a 5-4 split, patience prevails at the Bank of England, despite a clear lean toward easing. Inflation is cooling, wage growth is losing steam, and while March remains a live option for a cut, the committee wants more evidence before making a move. Political uncertainty is adding to the tension, knocking the pound and pushing long-term gilt yields higher."

LEE HARDMAN, SENIOR CURRENCY ANALYST, MUFG, LONDON:

"The pound has sold off initially and that reflects the fact that the vote was obviously a lot closer than expected.

"It certainly looks a lot more dovish from the headlines than we had been anticipating… It certainly looks like we could get a cut as early as the next policy meeting."

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

"Having cut the UK base rate six times in the current cycle, rate setters on the Bank of England's Monetary Policy Committee were wary of opting for a seventh easing. However, with inflation widely expected to fall sharply from April and settle at lower levels, the door certainly remains open to cuts in the near future.  

"The key moment in the immediate future will be confirmation that regulatory and other price adjustments from April 2025 will drop out of annualised calculations this year. This should result in CPI inflation dipping below target sooner than the Bank anticipates, providing scope for easier policy in months to come."

JEREMY STRETCH, HEAD OF G10 FX STRATEGY, CIBC CAPITAL MARKETS, LONDON:

"We have another five-four split again. Clearly, that leaves Governor Bailey, once again, as the ultimate swing voter. He was the swing voter in December. One suspects that he may well prove to be the swing voter come March.

"We've long assumed that March was a live meeting and was underpricing.

"We've got twin problems for sterling today, obviously, with more rate cuts being priced and all the political risks. Normally, you would play certainly the political risk via cable, but I think ultimately, probably euro/sterling is the better way to play (the rate outlook)."

PHILIP SHAW, CHIEF ECONOMIST, INVESTEC, LONDON:

"The main feature of the meeting was that the result was closer than expected, with four members dissenting and voting for 25 basis points. We thought the would be a clear majority to keep policy on hold for the time being. A low inflation forecast has contributed towards easing some members’ concerns about inflation persistence, concluding that the degree of disinflation process is on track. Our forecast has been that the MPC would keep rates on hold until the end of April, but we wouldn’t be surprised if that cut is brought forward."

(Reporting by Reuters Markets Team; Compiled by Dhara Ranasinghe; Editing by Amanda Cooper)