The Bank of England kept borrowing costs on hold on Thursday, but a narrow vote and signs that Governor Andrew Bailey might soon join those seeking a rate cut boosted the prospect of a move in December once the government’s budget has been unveiled.
Mindful of Britain’s still-high headline inflation rate, the nine-strong Monetary Policy Committee voted 5-4 to keep the central bank’s benchmark Bank Rate at 4%.
Most economists polled by Reuters last week had predicted a 6-3 decision by the MPC to leave it unchanged.
The MPC saw a bigger risk of weaker demand in the economy while the chance of inflation getting stuck too high had diminished, the central bank said.
Bailey was among those who decided to keep borrowing costs unchanged but he was the only one of those five who felt that overall inflation risks had moved down.
He said the inflation outlook was at “quite an important moment” but he felt there was “value in waiting for further evidence” over coming weeks.
Deputy Governors Sarah Breeden and Dave Ramsden were in the bigger-than-expected minority of four seeking a rate cut. For Breeden, it was the first time she had voted against the majority since she joined the MPC two years ago.
The pound shed around a third of a cent against the U.S. dollar before recovering and short-dated British government yields fell by a relatively modest three basis points after the announcement.
The MPC’s next rate decision is due to be announced on December 18.
Investors were pricing a roughly 65% chance of a reduction in Bank Rate next month.
By then the BoE will have seen two more sets of inflation and jobs data along with details of finance minister Rachel Reeves’ budget on November 26 that is expected to include broad tax increases, which could weigh on the economy.
“It is now a question of timing, and whether a quicker pace of policy easing will be needed. A December rate cut certainly seems more likely after today,” said Ellie Henderson, an economist with bank Investec.
Deutsche Bank’s Chief UK Economist Sanjay Raja said he believed the BoE was on course to cut rates next month and then twice more to take Bank Rate to 3.25% by the summer.
BOE SAYS UK INFLATION HAS PEAKED
Britain’s inflation of 3.8% remains the highest among the Group of Seven major advanced economies and the BoE’s benchmark interest rate is double the European Central Bank’s, adding to the challenge for the government to speed up the economy.
However, inflation unexpectedly held steady in September and recent jobs data has also hinted at weakening price pressures.
The MPC said it believed inflation had peaked and would fall in data for October and November as weaker economic growth and a worsening jobs market took their toll on demand.
“We still think rates are on a gradual path downwards, but we need to be sure that inflation is on track to return to our 2% target before we cut them again,” Bailey said.
Thursday’s decision represented the first pause in the BoE’s already-gradual, once-every-three-months pace of rate cuts which started in August 2024.
The BoE forecast that inflation will remain above its 2% target until the second quarter of 2027 – the same as in August – although it did forecast inflation would be slightly lower then, at 1.9%, and also flagged the weakness in the jobs market.
In another sign of its worries about an economic slowdown, the central bank expressed concern that households might not use their high levels of savings to spend more and slightly raised its forecasts for unemployment over the next three years.
GUIDANCE CHANGE
As part of a wider overhaul of how it explains its thinking, the MPC tweaked its key message about the outlook for rates.
A line from previous statements that it thought “a gradual and careful approach” to cutting rates was appropriate was replaced by the phrase: “If progress on disinflation continues, Bank Rate is likely to continue on a gradual downward path.”
The decision to keep rates on hold was not a surprise to investors. Pricing of interest rate futures on Wednesday had implied only a one-in-three chance of a quarter-point cut.
Bailey said that current market pricing – which implies two or maybe three quarter-point rate cuts by the end of next year – was close to “a fair description of my position at present”.
For the first time the BoE published summaries of the views of individual MPC members as part of a revamp of its forecasting process and the way it explains its thinking after being widely criticised when British inflation topped 11% in October 2022.
It forecast economic growth of 1.5% for this year, up from 1.2% in its previous forecast, and 1.2% for 2026, unchanged from the August projections.
(Writing by William Schomberg）
