Bank of England Expected to Hold Rates, Focus Shifts to Bond Sales

Sept 13 (Reuters) – The Bank of England (BoE) is expected to hold off on interest rate cuts during its meeting next week, with attention shifting to the pace of its bond sales—an increasingly contentious political issue.

According to a Reuters poll of 65 economists, the BoE is likely to maintain rates at 5.0% on Sept. 19, following a cut from 5.25%, a 16-year high, in August.

Recent data on price pressures has been mixed. While wage growth has cooled, as anticipated by members of the Monetary Policy Committee (MPC), the economy also stagnated in July. However, the Decision Maker Panel, a business survey closely monitored by the MPC, indicated that wage growth expectations have stopped falling. Inflation data set to be released on Wednesday is also expected to show levels above the central bank's 2% target.

As of Thursday, markets had priced in a roughly 20% chance of a rate cut next week, with a 0.25 percentage point reduction fully priced in for November.

With British wage growth and services inflation remaining elevated, investors expect the BoE to loosen monetary policy less aggressively than the U.S. Federal Reserve, but similarly to the European Central Bank (ECB). The ECB has already implemented two rate cuts this year, including one just days ago.

Nomura economists pointed to the BoE’s narrow 5-4 vote in August and robust business surveys as signs that the central bank is likely to hold rates steady next Thursday. “We anticipate the MPC skipping this month's meeting and cutting rates again in November," they said, noting that Swati Dhingra is likely to be the only MPC member advocating for a rate cut this time.

Focus on Quantitative Tightening (QT)

Bond investors are eagerly awaiting Thursday’s decision on the pace of the BoE’s quantitative tightening (QT) program, which involves reversing past purchases of British government bonds (gilts) aimed at stimulating the economy.

Last year, the MPC voted to reduce its gilt holdings by £100 billion ($131 billion) through a combination of active bond sales and allowing bonds to mature.

The QT program has faced criticism from lawmakers, as it accelerates losses incurred by the BoE from purchasing gilts at higher prices than their current sale value. These losses, in turn, burden already-stretched taxpayers.

Investors and policymakers will be closely watching the BoE's decisions on both interest rates and QT for signals of the bank’s future monetary strategy.