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The Bank of England warned that stubborn inflation would prevent it from cutting interest rates quickly, as it kept monetary policy on hold despite lowering growth forecasts.
In a six-to-three decision on Thursday, the Monetary Policy Committee maintained the benchmark interest rate at 4.75 percent, with the majority expressing concern that recent increases in wages and prices “increased the risk of persistent inflation.”
The move came even as the Bank of England forecast zero growth in the final quarter of the year – a drop from its previous forecast of 0.3 per cent – adding to the economic woes facing Chancellor Rachel Reeves.
Pointing to budget measures that raised employer taxes and the national living wage, the bank noted “significant uncertainty about how the economy will respond to higher overall employment costs.”
“Most indicators of activity in the UK in the near term have declined,” she added on Thursday.
“We believe that a gradual approach to future interest rate cuts remains correct,” Andrew Bailey said. Bank of England governor. “But with increasing uncertainty in the economy, we cannot commit to when or how much we will cut interest rates next year.”
Traders expect the Bank of England to cut interest rates by a quarter of a point next year – the same as it did just before Thursday's decision. This compares to the four the market expected in October.
Rob Wood, a British economist at Pantheon Macroeconomics, said the MPC minutes were “dovish and therefore more hawkish than the six-to-three headline suggests.”
Inflation is likely to rise above 3 percent in the spring, he said, “with very pronounced rises in prices that could destabilize inflation expectations that are already above average and rising.”
The majority of Monetary Policy Committee members said that “recent developments have added to the argument” for gradual rather than rapid cuts in interest rates, warning of “the potential trade-off between persistent inflationary pressures and greater weakness in production and employment.”
The Bank of England's dovish language came a day after the US Federal Reserve indicated it would do so Slow the pace of interest rate cuts Next year as you manage a more buoyant economy coupled with persistent signs of inflation.
I also followed this week's data that showed this The UK inflation rate rose to 2.6 percent last month, from 2.3 percent in October.
But the three Monetary Policy Committee members who favor a quarter-point cut – Deputy Governors Dave Ramsden, Alan Taylor and Swati Dhingra – pointed to a “slowdown in demand” and a weak labor market.
The Bank of England added that risks to global growth and inflation due to geopolitical tensions and trade policy uncertainty had “increased materially” – an apparent reference to US President-elect Donald Trump's plans to increase tariffs on imports into the US.
Reeves' allies said Britain was facing a “very difficult period” but stressed the chancellor was pushing long-term reforms in areas such as pensions and planning to boost growth.
But with inflation rising, growth stalling and confidence among employers declining, the Chancellor enters 2025 with growing uncertainty about her financial plans. It only has £10bn set aside as a buffer against its own borrowing rules.
If growth performance is lower than expected and interest costs remain higher than expected, Reeves may have to look for politically painful new spending cuts in the spring – or tax hikes in the fall – to make her fiscal plans work.
Sterling and gold yields fell slightly after the decision to suspend interest rates, as investors focused on a larger-than-expected group of dovish people calling for immediate interest rate cuts.
The British pound fell to $1,260 after the Bank of England's announcement, although it was still up 0.2 percent on the day. The yield on interest rate-sensitive two-year government bonds fell to 4.46 percent.
The Bank of England cut interest rates by a quarter of a percentage point at its previous meeting in November, but indicated at the time that another cut was unlikely until 2025. It has cut rates twice in 2024 and is scheduled to announce its next interest rate decision in February.
