BOE Warns of Rising Inflation Risks as it Holds Rates Steady

The Bank of England predicted that British inflation will exceed 4% in early 2024, citing increased energy prices and a prolonged conflict in the Middle East. The central bank held interest rates unchanged at its meeting on Thursday, while also adjusting its plans to sell UK government bonds by pausing sales until further notice.

The move boosted gilt prices and weighed on the pound, which fell 0.1% to $1.3366 against the US dollar. Simon Dangoor, a deputy CIO at Goldman Sachs Asset Management, said that the Monetary Policy Committee's central block is now flagging upside inflation risks but wants to see second-round effects before raising rates.

Mohit Kumar, Chief European Economist at Jefferies, noted that reducing gilt sales and eventually abolishing them for long-dated bonds is a positive development. This change in policy effectively alters the supply-demand picture, particularly for longer-dated gilts, leading to a rally in gilt prices.

Felix Feather, an economist at Aberdeen Edinburgh, stated that the Bank of England's decision to hold rates steady doesn't come as a surprise and that the vote split was 6-3. However, he believes that the November meeting could see rate hikes due to the deepening inflationary impulse from higher energy prices.