Reserve

Bank

Jerome Powell

The Bank of England (BoE) just slashed its interest rates for the first time in over four years, cutting the key rate to 5%. This decision, made by a narrow 5-4 vote, ends the 16-year high of 5.25% that’s been in place since August 2023. 
The whole lead-up to this decision was filled with uncertainty, because the BoE didn’t give any clear hints about what they were planning, which kept everyone on their toes. 
Markets had already predicted a 61% chance of a 25-basis-point cut at the August meeting. This guesswork played a huge role in how things unfolded. 
<h3 id="b-market-reactions-and-gilt-yields-b">Market reactions and gilt yields</h3> 
Once the news was out, UK gilt yields started to show the market’s response. The yield on the 10-year gilt dropped over 9 basis points to 3.880%. The 2-year gilt yield fell more than 10 basis points to 3.702%. 
These give us a peek into how investors are digesting the BoE’s decision and what they think might happen next. Governor Andrew Bailey has said that: 
<blockquote>
 “I think the direction of travel is pretty clear.”&nbsp;
</blockquote> 
Andrew added that they plan to move cautiously, but he didn’t want to guess about how fast or slow future rate cuts would be.&nbsp; 
He explained that the central bank’s forecasts are based on the market curve, which includes rates implied by forward markets that lock in future prices. Andrew said these forecasts are in a “reasonable position” right now. 
<h3 id="b-federal-reserve-s-position-b">Federal Reserve’s position</h3> 
Meanwhile, over in the U.S., the Federal Reserve is dealing with its own issues. Last time he spoke to us, Jerome Powell hinted that if inflation meets their targets, they might cut interest rates by 25 basis points as soon as September.&nbsp; 
He was firm that this decision wouldn’t be influenced by the upcoming presidential election. Powell stressed that the Federal Reserve stays neutral and apolitical. In his own words: 
<blockquote>
 “We never use our tools to support or oppose a political party, a politician, or any political outcome. We would never try to make policy decisions based on the outcome of an election that hasn’t happened yet.”
</blockquote> 
Powell also seemed <a href="https://www.cnbc.com/2024/07/31/fed-meeting-live-updates-traders-brace-for-central-banks-rate-policy-outlook.html" rel="nofollow noopener" target="_blank">to</a> dismiss the idea of a 50 basis-point rate cut. 
<blockquote>
 “I don’t want to be really specific about what we’re going to do, but that’s not something we’re thinking about right now.”
</blockquote> 
&nbsp;

Bank of England cuts interest rates as Federal Reserve remains uncertain

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