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The Bank of England left monetary policy unchanged despite cutting its growth outlook, warning that stubborn inflation would prevent it from cutting interest rates quickly.
The Monetary Policy Committee voted 6-3 on Thursday to keep the benchmark interest rate unchanged at 4.75%, with a majority expressing concern that recent increases in wages and prices “increase the risk of sustained inflation.”
The move comes as the Bank of England expects growth to fall to zero in the final quarter of this year, revised down from its previous forecast of 0.3%, and as the economic challenges facing Chancellor Rachel Reeves deepen. It was done.
Referring to budget measures to increase employer taxes and the National Living Wage, the central bank noted “significant uncertainty about how the economy will respond to increases in overall employment costs”.
The report added on Thursday that “most indicators of short-term activity in the UK have declined”.
“We still think a gradual approach to future rate cuts is the right one,” BoE Governor Andrew Bailey said. “However, given the heightened economic uncertainty, we cannot commit to the timing or magnitude of rate cuts next year.”
Traders expect the BoE to cut interest rates by a quarter of a point twice next year, the same as it did just before Thursday’s decision. This compares to the four that the market had expected in October.
Rob Wood, UK economist at Pantheon Macroeconomics, said the MPC meeting minutes were “cautious and therefore more hawkish than the 6-3 headline would suggest”.
Inflation is likely to exceed 3% in the spring, he said, adding that “price increases could become noticeable and destabilize inflation expectations, which are already rising above average.” .
The MPC majority said that “recent developments have further strengthened the argument for gradual rather than rapid rate cuts,” adding that “a potential trade between more sustained inflationary pressures and further weakening in output and employment. Off” warning.
The BoE’s optimistic comments came a day after the U.S. Federal Reserve signaled it would slow the pace of interest rate cuts next year to preserve a more buoyant economy with persistent signs of inflation.
This week also saw data show that UK inflation rose to 2.6% last month from 2.3% in October.
However, three MPC members supporting the quarter-point cut – Deputy Governor Dave Ramsden, Alan Taylor and Swati Dhingra – cited “low demand” and a weak labor market as reasons for the move. .
The BoE added that risks to global growth and inflation from geopolitical tensions and trade policy uncertainty have “significantly increased”. This is clearly an indication of US President-elect Donald Trump’s plans to increase tariffs on goods imported into the US.
Reeves’ allies said the UK was facing “extremely difficult times” but insisted the prime minister plans to push through long-term reforms in areas such as pensions and boost growth. did.
But the chancellor will enter 2025 with increasing uncertainty over his fiscal plans, with inflation rising, growth stalling and employer confidence declining. She has only set aside £10bn as a cushion against her own borrowing rules.
If growth slows and interest costs remain higher than expected, Mr. Reeves will be forced to seek politically painful new spending cuts in the spring or tax increases in the fall to shore up his fiscal plan. There is a possibility.
“We want to put more money in the pockets of working people, but that’s only possible if inflation remains stable,” he said on Thursday. “I fully support the Bank of England in achieving that.”
Sterling and gold yields fell after the rate decision as investors focused on a larger-than-expected dovish group calling for an immediate rate cut.
By late afternoon trading, the market was pegging the probability of a points cut in the third quarter of next year at 15%.
Following the Bank of England’s announcement, the pound fell slightly on the day, falling to $1.255. The yield on two-year government bonds, which is sensitive to interest rates, fell by 0.03 percentage point to 4.43%.
The BOE cut interest rates by a quarter of a point at its last meeting in November, when it indicated further rate cuts were unlikely until 2025. The Bank has cut interest rates twice in 2024, and the next interest rate decision is scheduled to be announced in February.
