The Bank of England (BoE) concluded its final monetary policy meeting of the year with a decision to leave interest rates unchanged, even as inflationary pressures in the United Kingdom intensified. This move aligns with expectations from analysts, who had widely anticipated a rate hold, given the continued challenges posed by stubborn services inflation and escalating wage growth. Yet, the decision also revealed widening divisions within the central bank’s Monetary Policy Committee (MPC), signaling the complexities ahead for the institution.
The backdrop for the decision is a U.K. economy grappling with mixed signals. November’s headline inflation rose to 2.6%, its highest level in eight months, driven by persistent cost pressures in the services sector. The BoE acknowledged that this figure exceeded prior projections, further complicating the central bank’s balancing act between curbing inflation and supporting economic growth. Despite maintaining rates at 4.75%, a level reached after two quarter-percentage-point reductions earlier this year, the committee’s internal dynamics showcased a divergence in perspectives.
Three members of the nine-strong MPC voted to cut rates, a departure from forecasts which had suggested that only one member might advocate for such a move. This split reflects an ongoing debate over how best to address the economic headwinds facing the U.K. While the majority favored holding rates steady, citing concerns over elevated inflationary pressures, the dissenters pointed to growing evidence of economic fragility, including weaker-than-expected growth figures in recent months.
Following the announcement, market reactions underscored the delicate nature of the BoE’s decision-making. The British pound initially pared gains against the U.S. dollar, rising 0.25% by midday trading. The currency’s performance followed a broader rally in the U.S. dollar the previous day, driven by the Federal Reserve’s quarter-point rate cut and hawkish signals about its 2025 outlook. The greenback’s strength has since moderated, but the interplay between global central bank policies remains a critical factor influencing currency and bond markets.
The BoE’s statement highlighted a revised economic outlook for the fourth quarter of 2024, projecting zero growth compared to the 0.3% expansion anticipated in November. This downgrade comes on the heels of a surprise contraction in October, when the U.K. economy shrank by 0.1%. Combined with rising inflation, these figures paint a picture of an economy teetering on the edge of stagnation. Money markets have responded by adjusting their expectations for future rate cuts, scaling back bets from 70 basis points to approximately 50 basis points for 2024. The recalibration reflects a growing recognition of the BoE’s cautious approach to monetary easing.
Economic experts have weighed in on the implications of the BoE’s latest move. Suren Thiru, economics director at the Institute of Chartered Accountants in England and Wales, described the split vote and dovish meeting minutes as indicative of a potential February rate cut. However, Thiru warned that the BoE risks constraining its future options if inflation remains persistent or if stagflation—a toxic mix of stagnating growth and high inflation—takes hold. Meanwhile, Matthew Ryan, head of market strategy at Ebury, characterized the MPC as “more divided than ever,” with doves emphasizing the fragility of the U.K. economy and hawks urging caution in light of inflationary risks.
Government bond markets reacted sharply to the BoE’s announcement. Yields on 10-year U.K. gilts rose by four basis points to 4.596%, extending a trend that has seen the U.K.’s risk premium over Germany climb to its highest level since 1990. In parallel, German bond yields also increased, with the benchmark 10-year bund yield rising by five basis points. These movements highlight the growing divergence in monetary policy outlooks across Europe’s major economies, with the European Central Bank recently cutting rates for the fourth time this year and signaling further easing measures for 2025.
The BoE’s decision underscores the challenges of navigating a precarious economic environment. As policymakers grapple with competing pressures, their decisions will remain under close scrutiny from markets and observers alike.
