BOE holds rates, committee split on rate cuts
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The news: The Bank of England (BOE) held its key interest rate steady at 4.75%, with three of its nine policymakers dissenting in favour of a 0.25% cut to 4.5%.
The context: The scale of support for a quarter-point move was not anticipated by economists, boosting expectations for reductions next year.
Governor Andrew Bailey said the central bank needed to keep its “gradual approach” to rate adjustments amid heightened economic uncertainty, and it couldn’t commit to the timing or scale of future cuts.
The UK economy faces risks from rising wages, weak business sentiment and geopolitical factors, including potential trade barriers linked to the incoming Trump administration.
Reuters polling last week showed economists anticipated the BOE would reduce rates four times in the next year. Unexpectedly rapid wage growth and higher inflation data this week had lowered those odds. But investors on Thursday took the vote split and Bailey’s remarks as unexpectedly dovish, again increasing expectations for deeper rate cuts in 2025.
Money markets after the decision priced in two quarter-point reductions with a strong likelihood of a third. Gilt yields fell compared to pre-announcement levels, and the pound pared earlier gains, settling near USD1.26 ($2.01).
The numbers: Earlier this week, data showed wages continued to increase at a rapid pace in October, while inflation rose to an eight-month high of 2.6% in November, the highest in the G7, driven by surging energy costs.
Meanwhile, BOE economists downgraded the UK’s economy growth forecasts to stagnation in the three months through December, down from modest growth.
What they said: "With the heightened uncertainty in the economy we can't commit to when or by how much we will cut rates in the coming year," governor Bailey said.
Monetary policy committee dissenters warned restrictive policies risk inflation falling below target and creating spare capacity.
“In the medium term, a continued stance that was very restrictive risked deviating unsustainably from the 2% inflation target and opening an unduly large output gap,” the bank minutes said.
The sources: BOE statement , The Wall Street Journal , Bloomberg
