The Bank of England decided to maintain interest rates at their current level, as announced during its final meeting of December, in response to UK inflation reaching an eight-month high.
Three members of the BoE’s Monetary Policy Committee (MPC) voted for a rate cut, contrary to expectations, with six voting to keep rates steady. Economists had forecast only one vote for a cut.
The BoE trimmed down its growth forecast to zero growth for Q4 from the prior projection of 0.3% expansion.
Key Background:
The Bank of England, BoE, concluded its final meeting of the year on December 19, announcing that it would hold interest rates. This follows UK inflation rising to an eight-month high, where policymakers continue to struggle with persistent inflationary pressures, especially in services and wages.
Three members of the Monetary Policy Committee voted in favor of cutting interest rates against expectations, when a rate cut was anticipated for one member. Six of them decided to retain their respective rates. Surprised by the sudden division in voting, markets resulted in trimming the brief British pound gains against the dollar in the aftermath of the decision announcement.
This follows the BoE downwardly revising the outlook of the UK’s economic situation. The central bank updated the forecast of its fourth-quarter to zero, compared with its previously forecasted 0.3% expansion, while also updating weak performance by the surprising contraction of 0.1% in October. Thus, money markets trimmed back their expectations, which is now pricing in about 50 basis points of cuts in rates for next year, down from their earlier forecast of 70 basis points.
It observed that inflation went upto 2.6% in November, above its forecast and that services inflation was “elevated.” Its economists are also worried about the stagflation risks, where the inflationary pressures would complicate the decisions taken on future directions of monetary policy.
According to Matthew Ryan, head of market strategy at Ebury, there was a growing split vote among the BoE policymakers shown during the split vote as “some focused on a fragile UK economy and others wanting to remain cautious given ongoing inflation.” The news spurred an increase in UK government bond yields as investors began to react to the uncertainty of the future rate moves by the bank. It shows a broader global trend because the European Central Bank has recently signaled further continued monetary easing in 2025.
