Bank of England: Three things to follow from the September meeting - Gate

Almost no one expected a rate cut this month, but the voting divergence and forward guidance will be closely monitored to determine if there will be slight support (or lack thereof) for action in November. We slightly lean towards another rate cut later this year, although this largely depends on economic data.

Voting Discrepancies Followed

The September meeting is almost certain not to lead to another rate cut, with policymakers expected to maintain the interest rate at 4% on September 18. However, the prospects for a rate cut in November remain unclear, and this meeting will be closely watched for signs of whether officials are still considering further easing of monetary policy this year.

The first thing to pay attention to is the voting results. Our most optimistic guess is that 6 officials will vote to keep interest rates unchanged, while 3 will vote in favor of a further 25 basis point cut. Dissenting opinions may include Swati Dhingra and Alan Taylor, the latter of whom initially voted for a 50 basis point cut in August (later changed his stance, breaking an unprecedented deadlock). Recently, central bank deputy governor Dave Ramsden has been supportive of those advocating for a rate cut, which raises some questions.

Regardless of the outcome, we always cautiously avoid overinterpreting voting discrepancies. History tells us that its predictive power for future meetings is not as strong as some investors might imagine.

The Forward Guidance Attracts Attention

For some time, the Bank of England's communication has merely indicated that further easing policies may be "gradual" and "cautious." However, during the hawkish meeting in August, a striking aspect was that the Bank of England stated, "the restrictiveness of monetary policy has diminished." This is an obvious statement, although it has been interpreted by some as a hint that interest rate cuts are nearing their end.

We believe that there will be no changes to this at the meeting in September, unless there are any unexpected inflation or employment data in the days leading up to the meeting decision. Fundamentally, considering that the overall inflation rate will remain above 3.5% by the end of the year, the Bank of England remains skeptical about the inflation trend for the rest of this year.

Quantitative Tightening Strategy

Every September, the Bank of England votes on how much government bonds it hopes to reduce in the next 12 months. In recent years, this target has been set at £100 billion, achieved through actively selling UK government bonds and allowing bonds to mature without reinvestment. The goal is to continue doing this until the bank's reserve levels reach a balanced level.

No one knows exactly what this level is, but research by the Bank of England suggests it is between £380 billion and £550 billion. If the Bank of England continues to provide £100 billion in QT loans over the next 12 months, along with the repayment of some loans introduced during the COVID-19 (Term Funding Scheme), then by this time next year, reserves could reach the upper end of that range.

In recent months, the use of the Bank of England's repurchase tools has increased significantly, indicating that we are getting closer to a more balanced situation regarding the supply and demand for bank reserves. Although the Bank of England believes that QT has not had a significant impact on the market, the pressure facing the UK long-term gilt market is growing.

Therefore, we expect the pace of QT to slow down. The annual reduction target has been lowered to £75 billion, which is consistent with recent surveys of market participants, making it unlikely to disrupt the status quo. We will also look for any signs that the Bank of England is ready to shift active sales away from long-term bonds.