UK Economy Faces Uncertainty as Bank of England Holds Interest Rates
The Bank of England’s Monetary Policy Committee has decided to keep interest rates unchanged at 4.75%, despite a growing divide among policymakers. The 6-3 vote to maintain the current rate reflects the committee’s cautious approach to tackling the UK’s slowing economy and persistent inflation pressures.
A Split Decision
Deputy Governor Dave Ramsden and newcomer Alan Taylor joined dovish member Swati Dhingra in voting to cut rates by a quarter point to 4.5%. This unexpected move sent sterling tumbling and British government bonds recovering some of their losses from the previous day’s US Federal Reserve meeting.
Gradual Approach
Governor Andrew Bailey, who voted with the majority, emphasized the need for a gradual approach to cutting rates. “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,” he stated. The central bank’s cautious stance is influenced by the UK’s contracting economy, which has shrunk for two consecutive months, and the impact of the new government’s tax increases on employers.
Inflation Pressures Persist
Despite signs of slowing economic growth, inflation pressures remain sticky, with wage growth exceeding expectations. This has led financial markets to scale back their expectations of rate cuts in 2025. The European Central Bank, on the other hand, is expected to cut rates more aggressively.
Market Expectations
Markets are now pricing in 0.53 percentage points of rate cuts for 2025, up from 0.46 percentage points before the BoE statement. However, this is still significantly less than the 1.08 percentage points expected from the ECB. According to Yael Selfin, chief economist at KPMG UK, “The MPC’s ability to ease interest rates next year will be constrained by the challenging inflation backdrop.”
Rate Cut Timing Uncertain
Sanjay Raja, chief UK economist at Deutsche Bank, predicts the BoE will cut rates by a quarter point in February and then wait until the second half of 2025 before cutting rates further. Financial markets have priced in a 45% chance of a quarter point rate cut in February. Governor Bailey acknowledged that market expectations are reasonable, but the timing of rate cuts remains uncertain.
Slower Rate Cuts Ahead
The BoE has been less willing to cut rates than its counterparts in the US and Europe, reducing rates by just half a percentage point this year. With inflation expected to continue rising in the near term, the central bank’s gradual approach may lead to slower rate cuts in the coming year.
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