Why did the Bank of England hold interest rates in September? 

At a glance:

• The Bank of England (BoE) has decided to keep interest rates at 5%.
• The base rate is one of the BoE’s most important tools in keeping inflation “low and stable”.
• The decision was not a huge surprise and is in line with market expectations.

What happened today, and what was the market reaction?

Policy decisions from the Bank of England will never pass completely under the radar. Even so, the September announcement caused little excitement.

While the Federal Reserve's recent 0.5% rate cut - the first interest rate cut in four years - made a few waves, expectations were that the BoE would either announce another cut of 0.25% or make no change at all. It was the latter.

With inflation unchanged between July and August – and at 2.2% it is very close to the BoE’s target – whatever the central bank did, it was unlikely to be dramatic this time.

What does our investment team think?

Nutmeg Investment Strategist, Scott Gardner, explains why the announcement was "no surprise".

"Patience is being practised following the first cut in August. Services inflation and wages remain elevated, and with the Ofgem energy price cap being raised, the Bank is following a prudent approach to ensure that the path of inflation continues on a lower trajectory.

"The hold was expected by the market, with November being teed up for the next cut with 25 basis points priced in."

What could happen next?

What is more important for investors is the direction of travel. To work this out, there are two things we can pick out of the BoE’s own messaging. 

The first thing to remember is that the Bank isn’t just tasked with getting inflation close to 2%. It needs to keep it stable at that level.

Although it’s close to where it should be now, the 3-year average for UK inflation (as measured by the Consumer Prices Index or ‘CPI’) is much higher, at around 6.5%. The BoE will want to make sure that it stays where it is.

However, point number two is that the BoE has also confirmed it still views current monetary policy as “restrictive”.

As a general rule, if inflation is too high the economy is seen as running “too hot”. Higher interest rates can be used to cool it down, but this can come at the expense of growth.

Putting these two things together, the direction of travel seems pretty clear. The Bank of England wants to reduce interest rates further to support growth, because it has said so. But it doesn’t want to cut rates so fast as to undo its good work bringing down inflation.

In comments written in the lead up to the decision, J.P. Morgan Economist Allan Monks said,

"In our view there has been a slightly more dovish shift from the BoE under the surface in recent weeks. Its forecasts highlight the possibility of faster cuts if it were to gain confidence that the upside risks to inflation are fading.

"It's therefore possible that the BoE could pivot if an accumulation of evidence builds. But the required data surprises have generally remained elusive to date, and we therefore maintain our view that the BoE will ease at a quarterly pace for the foreseeable future"  

In other words, rates are likely to continue to come down, but steadily. 

Risk Warning:

As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. Past performance and forecasts are not a reliable indicator of future performance.