BoE holds rates steady, while the ECB cuts rates again

Bank of England

The BoE’s cautious stance on holding rates caught the market off guard, after the Fed’s decision to kick start their cutting cycle with a 50-basis-point cut yesterday. Governor Andrew Bailey said cooling inflation pressure meant that the BoE should be able to cut rates gradually over the months ahead. "But it's vital that inflation stays low, so we need to be careful not to cut too fast or by too much," Governor Bailey said in a statement released alongside the rate decision. MPC members held a “range of views” over how entrenched domestic inflationary pressures will prove, adding that most believed that further gradual rate reductions will be needed.

U.K. headline inflation neared the BoE’s target at 2.20% in August, but core inflation stayed elevated at 3.60%. Concerns remain over the “stickiness” of price pressures in some sectors, where wage growth has prompted firms to raise prices. September data showed average wage growth in the U.K. cooling to a two-year low over the three months to July, yet remained relatively high at 5.10%. Despite a recent drop in the unemployment rate, the labour market continued to loosen.

After moderate growth in the first half of the year, the U.K. economy is expected to return to slow to around 0.30% per quarter, adding to calls for the BoE to lower borrowing costs further. Meanwhile, GBP strengthened following the BOE announcement, trading briefly above $1.3300 for the first time in over two years.

European Central Bank

The ECB cut interest rates by 25 basis points, reflecting continued concerns about weak eurozone growth and easing inflation. The ECB expects inflation to return to 2.00% by 2025, but economic uncertainty and volatile inflation present challenges for clear communication about its future.

Labour costs rose by 4.70% in the second quarter, slightly down from 5.00% but still above the ECB’s target range. Annual headline inflation rose 2.20% in August, unchanged from July, but is expected to rise before the end of the year as steep energy price drops fall out of the comparison.

Despite the unanimous decision to cut rates, policymakers are divided on the pace of future cuts. Some council members favour a gradual approach, while others prefer to wait until more economic data is available. ECB Chief Economist Philip Lane suggested that future rate cuts would be data-dependent, with potential for quicker cuts if the economy weakens or inflation eases more rapidly. Inflation remains volatile, with projections showing price growth slowing in September but accelerating towards the end of the year. ECB Vice President Luis de Guindos echoed the need for optionality in future rate decisions, stressing that inflation may not sustainably return to 2.00% until late 2025.

Moving forward

After today’s announcement, market pricing for the two remaining BoE meetings showed less confidence that there would be two more rate cuts by the end of 2024. There is now a 2-in-3 chance of a November cut, down from what was considered a foregone conclusion before.

President Lagarde’s caution against a rate cut next month led markets to assign just a 1-in-4 chance of a move, while fully pricing in a December rate cut. With the eurozone economy seeing signs of growth outside of Germany, it seems unlikely that the ECB will accelerate their easing efforts unless inflation falls in the coming months.