In a closely watched decision, the Bank of England (BoE) opted to leave interest rates unchanged at its December meeting, even as inflation in the United Kingdom surged to its highest level in eight months. The move, while widely expected, comes amid growing concerns about the U.K.’s economic trajectory and reveals deepening divisions within the central bank’s decision-making body.
The Monetary Policy Committee (MPC) voted 6-3 to hold rates steady at 4.75%, following two quarter-percentage-point reductions earlier this year. The split vote marked a surprising divergence from forecasts, with three members favoring an immediate rate cut. Economists had anticipated only one dissenting vote, underscoring the extent of uncertainty and debate within the MPC as it grapples with competing pressures of inflation control and economic stabilization.
November’s inflation data, showing a rise to 2.6%, has added urgency to the BoE’s deliberations. Services inflation remains a particular concern, with persistent cost increases pointing to entrenched pressures across key sectors of the economy. In its accompanying statement, the BoE acknowledged that inflationary trends have been stronger than anticipated, complicating efforts to balance monetary policy objectives. Meanwhile, the central bank revised its growth forecast for the fourth quarter of 2024 to zero, a sharp downgrade from the 0.3% expansion it had predicted just a month earlier.
Economic performance in recent months has been lackluster, with October’s surprise contraction of 0.1% adding to fears of stagnation. Money markets have responded to these developments by tempering expectations for the pace of rate cuts in 2024. Projections for total rate reductions next year have been scaled back to around 50 basis points from an earlier outlook of 70 basis points. This recalibration reflects the growing recognition that the BoE must tread carefully amid heightened risks of policy missteps.
Financial markets reacted swiftly to the BoE’s announcement. The British pound initially lost momentum against the U.S. dollar, trading 0.25% higher by midday. The move came as the dollar’s rally, fueled by the Federal Reserve’s recent rate cut and hawkish forward guidance, began to ease. Nonetheless, the broader context of global monetary policy shifts continues to influence currency and bond markets, with central banks worldwide navigating divergent paths.
Commentary from economic analysts has shed light on the implications of the BoE’s decision. Suren Thiru of the Institute of Chartered Accountants in England and Wales noted that the split vote and accompanying minutes suggest a February rate cut remains plausible, though not guaranteed. Thiru highlighted the risks of stagflation and warned that the BoE’s scope for maneuvering could narrow significantly if inflationary pressures persist.
Matthew Ryan of Ebury described the MPC’s divisions as emblematic of broader challenges facing the U.K. economy. He noted that dovish members of the committee have prioritized concerns over slowing growth, while hawkish members remain focused on curbing inflation. Ryan also flagged potential risks from fiscal policy and geopolitical tensions, particularly with the U.K. set to navigate uncertain trade dynamics in 2025.
Government bond yields mirrored the market’s unease. U.K. gilt yields rose by four basis points to 4.596%, maintaining a risk premium over German bonds that has reached its highest level in decades. German bund yields also climbed, with the 10-year benchmark rising by five basis points. The European Central Bank’s recent quarter-point rate cut, its fourth of the year, underscores the diverging monetary policy landscapes across major economies.
The BoE’s decision marks another chapter in its effort to steer the U.K. economy through an increasingly complex environment. With inflationary pressures persisting and growth stagnating, the path forward remains fraught with challenges, demanding careful deliberation and decisive action from policymakers.
