Bank of England Holds Interest Rates Amid Disagreement

By David Milliken and Suban Abdulla

LONDON (Reuters) – Bank of England policymakers voted 6-3 to keep interest rates on hold at 4.75% on Thursday, a larger split than anticipated, as officials debated responding to a slowing economy coupled with inflation pressures.

Deputy Governor Dave Ramsden and new Monetary Policy Committee member Alan Taylor unexpectedly sided with longstanding dove Swati Dhingra to vote for a quarter-point rate cut to 4.5%.

The British pound weakened, and government bonds regained some losses following Wednesday's U.S. Fed meeting, as investors speculated the BoE might reduce rates sooner than previously expected.

However, Governor Andrew Bailey, who voted to maintain the rate, emphasized the need for a gradual approach to rate cuts. He stated, "With heightened uncertainty in the economy, we can't commit to when or by how much we will cut rates in the coming year."

Britain's economy has contracted for two consecutive months, marking its first back-to-back shrinkage since the COVID-19 pandemic, attributed largely to the government's announcement of £25 billion ($31 billion) in tax increases for employers.

Economists had forecast the BoE would cut rates four times next year, but persistent inflation pressures, including unexpected wage growth, led markets to reduce rate cut expectations sharply.

Following the BoE's statement, markets priced a 0.53 percentage point cut for 2025, up from 0.46 but less than the 1.08 points expected from the European Central Bank (ECB).

Chief economist Yael Selfin at KPMG UK noted that the BoE's capacity to reduce rates next year would be limited by the challenging inflation environment, contrasting with the ECB's urgency due to weakening growth.

Sanjay Raja, chief UK economist at Deutsche Bank, projected a quarter-point cut in February followed by additional cuts in the latter half of 2025, with markets pricing in a 45% chance of such a cut in February.

In relation to expectations, Bailey acknowledged that while rate cuts are possible, their timing remains uncertain. "The market says, 'they might cut in February, they might not.' That's a pretty reasonable starting point," he remarked.

SLOWER RATE CUTS

The BoE has been more hesitant to cut rates compared to the Fed or ECB, lowering rates by only half a percentage point this year. Recent figures showed British inflation rose to 2.6% in November, slightly surpassing BoE forecasts and making it the highest among the Group of Seven economies.

The BoE expects inflation to rise slightly in the near term and reduced its growth forecast for Q4 2024 to 0% from 0.3% just six weeks ago, describing the finance minister's October 30 budget as net positive for short-term growth.

MPC members who voted to keep rates on hold expressed uncertainty about the impact of higher employment taxes on consumers and noted that changes in U.S. trade policy under president Donald Trump would also be unpredictable.

Five MPC members favored a gradual withdrawal of policy restrictions without commitments to specific meetings, while one member suggested the need for an "activist strategy" preferred previously by Catherine Mann, advocating holding rates steady until inflation clearly diminishes before implementing more significant cuts. The trio supporting cuts argued that a restrictive policy risked pushing inflation below the 2% target and creating excess capacity in the economy.

($1 = 0.7947 pounds)