In a significant yet anticipated conclusion to its final monetary policy meeting of the year, the Bank of England (BoE) chose to keep its benchmark interest rate unchanged on Thursday. This decision came against the backdrop of surging inflation in the United Kingdom, which reached an eight-month high, intensifying concerns about the nation’s economic stability.
The consensus among market analysts had leaned heavily towards a rate hold at the December meeting. Policymakers are grappling with the persistent challenges posed by high services inflation and robust wage growth, factors that continue to fuel economic pressures. This year, the BoE has already lowered its key interest rate twice, moving from 5.25% to 4.75% through incremental reductions of 0.25 percentage points each.
Despite market expectations aligning with the decision to maintain rates, the Monetary Policy Committee (MPC) delivered an unexpected twist. While six members voted to hold rates steady, three members broke ranks by advocating for a rate reduction. This divergence was notable, as economists polled by Reuters had predicted only one dissenting vote for a cut. The internal division reflects the growing complexity of the economic landscape the BoE must navigate.
The immediate market reaction underscored the significance of the decision. The British pound briefly trimmed its gains against the U.S. dollar following the announcement, trading 0.25% higher by early afternoon. The reaction was tempered by a broader rally of the U.S. dollar the previous day, fueled by the Federal Reserve’s decision to cut its interest rate by a quarter point while signaling a more aggressive stance for 2025. However, by Thursday morning, the greenback had surrendered some of its recent strength.
In its statement, the BoE highlighted that the uptick in headline inflation to 2.6% in November was slightly above previous projections. It described services inflation as “elevated,” a persistent challenge that continues to weigh heavily on the central bank’s policy calculus. The BoE also revised its economic growth forecast for the fourth quarter of 2024, now predicting zero growth—a stark downgrade from the 0.3% expansion anticipated in its November report. The revision reflects a broader trend of economic underperformance, with the U.K. economy contracting unexpectedly by 0.1% in October.
Money markets responded to the inflation and wage growth data published earlier in the week by adjusting expectations for the trajectory of future rate cuts. Expectations for 2024 rate reductions were scaled back from 70 basis points to approximately 50 basis points, reflecting a more cautious outlook.
Commentators have emphasized the divisions within the MPC and their implications for monetary policy moving forward. Suren Thiru, economics director at the Institute of Chartered Accountants in England and Wales, remarked that the split vote and the dovish tone of the meeting minutes left the door open for a possible rate cut in February. However, he cautioned that the BoE risks limiting its own flexibility as inflationary pressures evolve. The potential for stagflation—a simultaneous stagnation of economic growth and high inflation—could further complicate the timing and scope of future policy moves.
Matthew Ryan, head of market strategy at Ebury, echoed these sentiments, pointing to a stark divergence in policy perspectives within the MPC. He noted that the doves prioritized the fragile state of the U.K. economy, while hawks favored a more measured approach due to the recent inflationary uptick. Ryan also flagged additional inflationary risks stemming from domestic fiscal policies and potential geopolitical tensions, particularly in light of U.S. trade dynamics under President Donald Trump’s administration.
Bond markets reflected heightened sensitivity to the announcement, with U.K. borrowing costs rising. The yield on 10-year government bonds climbed by four basis points to 4.596%, continuing a trend that has placed the U.K.’s risk premium over Germany at its highest level since 1990. German bond yields also experienced upward pressure, with the benchmark 10-year bund yield rising by five basis points.
These developments occur amidst a broader global trend of monetary easing. The European Central Bank (ECB) last week enacted its fourth rate cut of the year, lowering rates by a quarter point and signaling a strong commitment to further easing measures in 2025. As the BoE navigates these turbulent waters, its decisions will undoubtedly remain a focal point for global financial markets, policymakers, and businesses alike.
