The Bank of England (BOE) signalled it will keep easing gradually as more officials backed calls for an immediate cut in borrowing costs, prompting traders to boost bets on reductions next year.
The Monetary Policy Committee voted 6-3 in favour of keeping its benchmark interest rate unchanged at 4.75 per cent, according to minutes from this month’s meeting released on Thursday.
Deputy governor Dave Ramsden and Alan Taylor – the BOE’s newest rate-setter – switched sides to join Swati Dhingra in advocating a cut. The scale of support for a quarter-point move was not anticipated by economists.
“We think a gradual approach to future interest-rate cuts remains right,” Governor Andrew Bailey said in a statement. “But with heightened uncertainty in the economy we can’t commit to when or by how much we will cut rates in the coming year.”
Investors took the vote split and Bailey’s comments as surprisingly dovish, adding to bets for reductions in 2025. Money-market pricing implied two quarter-point cuts and a strong chance of a third. Gilt yields dropped relative to where they were before the decision, while the pound trimmed earlier gains to trade around $1.26.
The BOE’s vote and its vow to ease gradually “seems to be a tacit pushback against the recent shift in market pricing to just two rate cuts next year,” said Thomas Pugh, an economist at RSM UK.
With Donald Trump poised to re-enter the White House in January, the UK central bank specified geopolitics and trade among the risks it sees, along with the impact of the Labour government’s recent budget. A stagflationary picture emerged in the description of officials, with economic growth now expected to be flat in the fourth quarter.
UK chancellor Rachel Reeves said that she “fully” backed the bank’s efforts to tame prices, even though it passed up another chance to cut borrowing costs.
“We want to put more money in the pockets of working people, but that is only possible if inflation is stable,” she said in a statement.
The decision places the BOE in a more dovish position compared with the US Federal Reserve, which renewed its focus on inflation in its own announcement on Wednesday.
While UK officials stuck with their guidance for gradual rate cuts and a meeting-by-meeting approach, they did note a growing risk of sticky prices after this week’s shock jump in wage growth and rise in inflation to an eight-month high.
Even so, the shifting vote suggest that such data are yet to deter the MPC from continuing with a cautious once-a-quarter pace to easing, removing constriction on the economy while guarding against inflation threats brewing at home and abroad.
“The split vote decision and the dovish tone of the minutes suggest that a February interest-rate cut remains very much in play, if not yet a done deal,” said Suren Thiru, economics director at the Institute of Chartered Accountants in England and Wales.
After 14 back-to-back hikes, UK officials have now lowered borrowing costs by just half a percentage point, and traders only expect a further two quarter-point moves in 2025. Prior to this week’s data, Bailey had hinted that a gradual approach implied four cuts next year.
The divergence in policy with the more dovish European Central Bank, which is firmly set on a course for steady rate cuts, prompted investors last week to push the pound to its strongest closing level against the euro in more than eight years.
Regarding lingering inflation threats, the BOE minutes noted risks on both sides, weighing weaker growth signals up against stubborn domestic price pressures.
Following recent disappointing activity data, the central bank’s officials downgraded their forecast for the fourth quarter, expecting zero growth compared to their November projection for a 0.3 per cent rise in gross domestic product. – Bloomberg
