The Bank of England (BoE) has decided to leave interest rates unchanged at 4.75% in its final monetary policy meeting of the year, amid ongoing concerns about rising inflation.
The decision by the Monetary Policy Committee (MPC), which sets interest rates, was not unanimous, with a split vote of 6-3. Three policymakers pushed for a rate cut to 4.5%, but their proposal was overruled by the majority of the committee members.
Governor Andrew Bailey explained, “We’ve held interest rates today following two cuts since the summer. We need to make sure we meet the 2% inflation target on a sustained basis. We think a gradual approach to future interest rate cuts remains right, but with the heightened uncertainty in the economy, we can’t commit to when or by how much we will cut rates in the coming year.”
The MPC’s decision to keep rates unchanged was influenced by the rise in inflation. Since the previous meeting, the twelve-month CPI inflation rate increased to 2.6% in November, up from 1.7% in September. This uptick was higher than anticipated, driven mainly by stronger inflation in core goods and food prices. Despite some stabilisation in household inflation expectations, services consumer price inflation remains elevated, and headline CPI inflation is expected to continue rising slightly in the near term.
Traders are now predicting that the Bank of England (BoE) will lower interest rates only twice in 2025, reducing the base rate from 4.75% to 4.25% by the end of the year. This follows a series of rate cuts earlier in the year, including those made in August and November, which have led to varying expectations about the BoE’s future actions.
Market sentiment remains divided as investors await the BoE’s February meeting, with a 70% chance of another rate cut being priced in for that time. However, the outlook for 2025 suggests only two further reductions, which is a relatively cautious approach compared to other central banks. Many analysts and traders are still uncertain whether the BoE will continue its easing cycle or hold off further cuts, depending on economic developments and inflation trends.
This stance from the BoE sharply contrasts with projections for other central banks, notably the US Federal Reserve and the European Central Bank, which are both expected to take more aggressive action in response to inflation concerns. While the Fed is anticipated to make larger cuts and the ECB to follow suit, the BoE seems more reluctant to engage in rapid or significant rate reductions, which may be a response to ongoing inflation pressures in the UK.
Goldman Sachs analysts have suggested that the BoE might opt for quarterly rate cuts, citing the persistence of near-term inflation numbers and the uncertainty surrounding the economic impact of policy changes such as the recent employer national insurance hike. Despite the potential for additional cuts, analysts at Nomura predict that rates will ultimately stabilise in the long term, with expectations for the BoE’s base rate to settle between 3% and 3.5% in the future. This would indicate a more moderate stance over the coming years, as the BoE carefully navigates the balancing act of managing inflation and supporting economic growth.
“We think it’s too early for the Bank of England (BoE) to pre-commit to a sustained cutting cycle or to conclude that risks to inflation returning sustainably to the 2% target in the medium term have dissipated,” said analysts at Bank of America in a note to clients. Their cautious outlook reflects the uncertainty surrounding the UK’s inflationary pressures, indicating that it remains premature for the BoE to make firm decisions about future rate cuts.
Investors are anticipating that the BoE will announce a second interest rate cut by November next year. However, despite this expectation, there is no clear consensus on the timing or scale of the cuts, as the central bank continues to assess the economic landscape. The uncertainty in inflation trends has led to a more measured approach, with a cautious stance on future rate reductions.
In November, Bank of England governor Andrew Bailey suggested that interest rates would likely trend “downward from here,” but he emphasised that this process would be gradual. Bailey’s remarks highlighted that any future rate cuts would need to be approached carefully, given the ongoing challenges in reaching the target inflation rate.
James Smith, a developed markets economist for the UK at ING, has noted that his base case predicts back-to-back rate cuts starting in February. He expects the Bank Rate to fall to 3.25% later in the year. However, Smith also acknowledged that, for the time being, the BoE will likely hold steady on rates. This is because inflation data still indicates that the central bank needs to remain cautious. Smith added that the BoE is expected to maintain its commitment to gradual rate cuts, offering little indication of major policy shifts in the immediate future.
UK inflation rose to an eight-month high of 2.6% in November, following Chancellor Rachel Reeves’ announcement of £40 billion in tax rises during the October budget. This marked an increase from 2.3% in the previous month, according to data released by the Office for National Statistics (ONS).
Rising wages have also been identified as a contributing factor to inflationary pressure. Pay growth has surged to 5.2%, up from 4.9% three months earlier, as reported by the ONS. This increase in wages further exacerbates inflationary concerns, particularly as the labour market continues to experience fluctuations.
The Bank of England (BoE) noted that most indicators of UK near-term activity have been on the decline in recent weeks, following its decision to cut interest rates at the beginning of November. Despite the rate cut, economic indicators suggest that growth remains subdued.
The Monetary Policy Committee (MPC) stated: “Bank staff expect GDP growth to have been weaker at the end of the year than projected in the November Monetary Policy Report.” This revision reflects growing concerns over economic performance heading into 2025. The MPC also mentioned that they now view the labour market as broadly in balance.
Furthermore, annual private sector regular average weekly earnings growth has seen a notable increase in the three months leading up to October. However, this growth has been more volatile than other wage indicators, making it difficult to predict trends with certainty. The latest data from agents’ intelligence indicates that average pay settlements for 2025 are likely to fall within the range of 3% to 4%. Despite these projections, there remains significant uncertainty about the future direction of the labour market.
For savers with variable-rate mortgages, the Bank of England’s decision to hold rates means that the cost of servicing debt will remain relatively stable. However, those on fixed-rate products may be hoping for a rate cut before their next remortgage. The current rate environment continues to put pressure on borrowers, especially those with significant credit card debt, as they feel the strain of the “higher-for-longer” interest rates.
In contrast, the Federal Reserve (Fed) decided to cut rates on Wednesday, lowering its range by 0.25 percentage points to 4.25%-4.5%. This marks a shift in the US central bank’s policy, which contrasts with the European Central Bank’s (ECB) decision to cut interest rates for the fourth time this year, bringing them down to 3% last week.
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