BoE Holds Steady Amid Market Optimism, Awaiting Gilt Reduction Strategy

With the Federal Reserve's rate cut now settled, attention shifts to the Bank of England (BoE) and its rate decision. Given Britain's high services inflation, rates are expected to remain steady at 5.0%. The market also anticipates a significant gilt reduction plan, while European equities enjoy a positive opening.

With the Federal Reserve's anticipated rate cut settled, the spotlight is now on the Bank of England (BoE) as it gears up for its rate decision. Despite Thursday's outcome appearing unlikely to make waves, the BoE faces the challenge of high services inflation in Britain, running at an annual rate of 5.6%. This almost guarantees a steady outcome, with rates expected to remain unchanged at 5.0%.

BoE policymakers are likely to emphasize their cautious approach against easing monetary policies too rapidly. Meanwhile, European stock futures suggest a positive opening, with the exuberance over the Fed's rate cut spilling over from Asian markets. EUROSTOXX 50 futures and FTSE futures have shown significant upticks.

Currency markets reacted predictably, with the dollar reclaiming losses against several peers, at one point rising over 1% against the yen. Beyond the rate decision, Thursday's focus may shift to the BoE's strategy for reducing its gilts balance sheet, which became inflated during the pandemic. Markets widely expect another 100 billion pound reduction over the next 12 months, potentially benefitting the bond market.

In a related development, Chinese bond yields fell broadly on expectations of further policy easing from Beijing. Stocks in Hong Kong and China reversed early losses, turning positive in anticipation of upcoming stimulus measures.

(With inputs from agencies.)