LONDON, Sept 19 (Reuters) - The Bank of England left interest rates at 5% on Thursday and voted to run down its stock of British government bonds by another 100 billion pounds ($132.86 billion) over the coming 12 months, weighing on the government's finances.

The Monetary Policy Committee voted 8-1 to keep rates on hold, with only external member Swati Dhingra voting for a further quarter-point rate cut after the BoE last month delivered its first reduction to borrowing costs since 2020.

Sterling rose to its highest levels since March 2022 just above $1.33 , having traded around $1.3266 ahead of the decision. It was around 0.3% higher against the euro at 83.95 pence . British government bond yields rose , , while London's FTSE stock index trimmed its gains (.FTSE) , opens new tab and was last trading around 0.9% firmer on the day.

COMMENTS:

CHRIS ARCARI, HEAD OF CAPITAL MARKETS, HYMANS ROBERTSON, GLASGOW:

"Given elevated core and services inflation, we still expect the BoE to reduce rates at a gradual pace. Looking further ahead, the market is already pricing a fair degree of further cuts, anticipating the bank rate to fall to 3.3% pa by the end of 2025."

"On the one hand, headline inflation remained unchanged in August, at 2.2% year-on-year, while a weakening PMI output price balance points to inflationary pressures subsiding. However, on the other hand, core inflation rose more than expected, to 3.6% year-on-year in August, from 3.3% in July, while solid growth is supporting strong labour markets."

LAURA COOPER, GLOBAL INVESTMENT STRATEGIST, NUVEEN, LONDON:

"The Bank of England is practicing patience, defying the path of its U.S. peers, in maintaining a cautious stance to the future policy decisions."

"As focus turns to the fiscal backdrop and the upcoming October budget, the Bank of England’s reluctance to follow major peers in a swifter cutting cycle will be challenged."

"Stubborn services inflation should ease as labour market slack builds. With fiscal effects to be weaved into policymakers’ November forecasts, a potential period of tax rises and public spending curtailments could warrant a steeper cutting cycle, keeping us comfortable with UK duration and reluctant to lean into the recent GBP/USD run-up."

JAMIE NIVEN, SENIOR PORTFOLIO MANAGER, CANDRIAM, LONDON:

"As expected by the market, the BoE held rates steady but with a slightly hawkish leaning in the vote composition (only one vote for a cut versus two broadly expected) and emphasis on cutting rates 'gradually'. We think it’s very likely that we’ll see another 25-bp cut in November and possibly again in December, but our biggest conviction is the terminal rate of the cutting cycle, which we continue to believe should be lower, especially relative to what’s priced for the US and euro terminal rates."

"It’s also worth noting the maintenance of 100 billion pounds of asset purchase run-off, meaning active sales will decline in the coming year. This is somewhat positive versus expectations and we believe could help to support the longer end of the gilt curve."

SUSANNAH STREETER, HEAD OF MONEY AND MARKETS, HARGREAVES LANSDOWN, BRISTOL:

"There is still optimism that, although the path may be a bit slower, the recent painful era of high interest rates is still coming to an end. That would offer more relief for companies and consumers who have been struggling with high borrowing costs.

"There is still an underlying pulse of positivity lifting London-listed stocks, as they have also been buoyed by the decision by the U.S. Federal Reserve to cut rates for the first time in more than four years, a larger than usual 50-bp downwards step. "

"The Fed’s priority for now is protecting the health of the U.S. economy, rather than beating inflation right down to target. That’s reassuring for investors in multinational companies listed on the FTSE 100, reliant on a more buoyant outlook for the world's largest economy."

HENRY COOK, EUROPE ECONOMIST, MUFG, LONDON:

"We expected a slightly more divided vote split than the 8-1 we got. The hawks on this side of the Atlantic still have plenty of ammunition, nominal pay growth is still uncomfortably high, underlying inflation remains elevated compared to other easing cycles, and so, it would be very hard to find consensus for back-to-back moves."

"With regard to quantitative tightening, I think the Bank of England is quite happy for QT to run in the background. If it’s working it’s working, no need to change it up."

DEAN TURNER, CHIEF EUROPEAN ECONOMIST, UBS GLOBAL WEALTH MANAGEMENT, LONDON:

"We expect the next interest rate cut to come when the Bank meets in November, armed with a fresh set of forecasts likely to show a modest downgrade in future inflation, and confirmation from the budget about how tight any squeeze will be as the new government addresses the UK’s fiscal gap."

"Beyond this, we anticipate a quarterly pace of cuts through next year, although the risks are rising that the Bank may pick up the pace of easing and move to a one-per-meeting cadence."

"Although the BoE kept rates unchanged, it did so amidst a global trend of central banks lowering policy rates as inflationary pressures recede. In our view, investors need to prepare their portfolios for a world of lower interest rates in the coming months."

LINDSAY JAMES, INVESTMENT STRATEGIST, QUILTER INVESTORS, LONDON:

"A rate cut would have been especially welcomed by consumers and businesses alike, given the economy remains close to stall speed. Having had a positive and rather buoyant first half of 2024, dark clouds are gathering once again and, as such, action from the BoE will be required sooner rather than later."

CHRIS SCICLUNA, HEAD OF ECONOMIC RESEARCH, DAIWA CAPITAL MARKETS, LONDON:

"We're likely to get a rate cut in November and then it's a case of whether they move by 25 bps at every meeting, or once a quarter."

"The 100 billion pound QT announcement was in line with expectations, which means the level of central bank reserves should be close to levels the BOE thinks is in line with the equilibrium."

RUPERT WATSON, GLOBAL HEAD OF MACRO AND DYNAMIC ASSET ALLOCATION, MERCER, LONDON:

"In light of sticky inflation data showing it falling, but still higher than target, the Bank of England kept interest rates unchanged."

"They have signalled cuts are on the horizon as the trend for wage growth and inflation is moving in the right direction. We think the UK economy is landing softly freeing up the BoE to cut rates over the next 6-12 months towards 3.5%."

FRANCES HAQUE, UK CHIEF ECONOMIST, SANTANDER, LONDON:

"Today’s call to hold was expected given the comments made by Governor Bailey at the August meeting, 'that the bank must not cut rates too quickly or by too much'."

"There has been positive news on wage growth – a determining factor in whether inflation will remain at target level - with this continuing to slow in July and with private-sector wage growth coming in line with the Bank of England's forecast for Q3 of 4.7%. Inflation figures out on Wednesday showed headline inflation sticking at 2.2%, but with services inflation increasing 0.4% month on month - albeit that was just below the Bank's forecast of 5.8% for August. This all suggests that a slow and steady pace will be maintained for future rate cuts."

($1 = 0.7527 pounds)

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https://www.reuters.com/world/uk/view-bank-england-leaves-rates-5-2024-09-19/