Bank of England leaves interest rate at 4.75%

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The Bank of England has kept interest rates at 4.75 percent as it seeks to combat both stubborn inflation and weak growth.

In a six-to-three decision, most members of the monetary policy committee warned that recent wage and price increases had “increased the risk of persistent inflation” and dampened hopes for rapid interest rate cuts in 2025.

“We believe a phased approach to future rate cuts remains the right thing to do,” said Andrew Bailey, BoE Governor. “But given the increasing uncertainty in the economy, we cannot commit to when and by how much we will cut interest rates in the coming year.”

He added that the BoE must ensure it can achieve its “2 percent inflation target on a sustainable basis.”

Rob Wood, British economist at Pantheon Macroeconomics, said the minutes of the meeting were “cautious and therefore more restrictive than the “6 to three” headline suggests.

He added that inflation would likely rise above 3 percent in the spring, “with clearly visible price increases that could destabilize already above-average and rising inflation expectations.”

The BoE’s relatively tough language came a day after the US Federal Reserve signaled it would slow the pace of its interest rate cuts next year amid signs of persistent inflation.

Britain’s central bank is grappling with rising price pressures and two straight months of falling GDP, complicating its own plans to cut interest rates next year.

Thursday’s decision, which was in line with forecasts from economists polled by Reuters, comes a day after data showed Inflation in the UK rose to 2.6 percent last month, up from 2.3 percent in October.

But the three MPC members backing a quarter-point cut – Deputy Governor Dave Ramsden, Alan Taylor and Swati Dhingra – cited “sluggish demand” and a weaker labor market.

“Given the evolving risk balance, a less restrictive policy rate was warranted,” they said.

BoE officials now expect zero growth in the final quarter of this year, weaker than forecast in November.

“Most indicators of short-term activity in the UK have declined,” the central bank said on Friday.

It added that risks to global growth and inflation had “increased significantly” due to geopolitical tensions and trade policy uncertainty – an apparent reference to US President-elect Donald Trump’s plans to increase tariffs on imports into the US.

Sterling and British government bond yields fell slightly following the widely expected decision to keep interest rates on hold. The pound fell to $1,261 after the BoE’s announcement, but was still up 0.3 percent on the day.

The yield on interest-sensitive two-year government bonds fell slightly to 4.46 percent.

However, government bond yields have risen in recent weeks as investors were spooked by inflation data and the Labor government’s budget plans for additional borrowing.

Traders still expect the BoE to make two quarter-point interest rate cuts next year – just as it did just before Thursday’s decision. That’s compared to the four values ​​the market was expecting as recently as October.

“The vote was more dovish than the market expected, suggesting that they have recently gone too far in pricing in rate cuts for next year,” said Lee Hardman, senior currency analyst at MUFG.

The BoE cut interest rates by a quarter point at its last meeting in November, but signaled at the time that further cuts were unlikely until 2025. It has cut rates twice in 2024 and is expected to announce its next rate decision on February 6.