The Bank of England kept borrowing costs constant for the first since November 2021, and the pound fell to its lowest point in six months. Bond yields also rose.
Investors sold the pound, pushing it 0.5 per cent down against the dollar, to $1.22. This is the lowest level since March, when a number of regional US banks collapsed.
The pound’s value is affected by changes in interest rates. Higher borrowing costs mean better returns for investors holding sterling. Conversely, a doveish monetary policies pushes the currency down relative to dollar. In July, the pound reached a record high of $1.31 per dollar after inflation remained stubbornly higher.
The Bank’s monetary committee (MPC), in a 5-4 vote split, decided to maintain the base rate at 5,25 percent. This vote split reflects a disagreement among rate-setters over whether borrowing costs were restrictive enough to bring inflation down to 2 percent.
Bond yields, which are inversely related to price, rose on the news. Two-year gilts fell to a new low of 4.6%, down 0.6 percentage points. Benchmark 10-year gilts rates, which represent the borrowing costs of the government, fell 0.85 percentage points, to 4.29 percent, their lowest level since July.
The MPC stated in its guidance to financial markets that it is ready to increase interest rates if signs of “persistent pressures on inflation and resilience across the economy” are seen.
The rate-setters acknowledged that the rapid rise in interest rates was affecting the job market, and that monetary policies were in “restrictive terrain”.
Five members of the MPC including Andrew Bailey, Bank governor, agreed that the key indicators of inflation in both the goods and services sector dropped enough in August to warrant no change in interest rates for this month. The US Federal Reserve announced no changes in interest rates on Wednesday.
The inflation data released yesterday prompted investors to increase their bets that rates would remain unchanged this week. Money markets had predicted that the base rate was likely to remain at its current level. This reversed a 90 percent probability of an increase in the rate at the beginning of the month.
Tim Graf, State Street’s managing director of macro strategy, said that the market reaction still suggests that the Bank decision was a “bit surprising”. He said that wage growth was still robust enough to have a second-round effect on inflation. “However the totality makes this decision very justified, as the domestic activity is slowing down and the previously hot labour markets are now showing signs which typically appear before pronounced recessions.”
The MPC’s next decision will be made on November 2. It will also release new forecasts for inflation and growth, and will have more data about the impact of rate increases on wage growth.
Thomas Pugh is an economist with the professional services company RSM. He said that UK interest rates peaked at 5,25 percent. He said that the inflation rate is expected to stay at its current level for about a year.