The Bank of England (BoE) has decided to keep its key interest rate unchanged at 4.75%, but the decision revealed growing divisions among policymakers about the need for rate cuts in response to a slowing economy.
Three members of the BoE’s nine-person Monetary Policy Committee (MPC) – Deputy Governor Dave Ramsden, and external members Swati Dhingra and Alan Taylor – voted in favor of reducing the rate by a quarter-point to 4.5%. This was a surprising move, as economists polled by Reuters had expected only one member to support a cut.
Despite this split, BoE Governor Andrew Bailey emphasized that the central bank would stick to its “gradual approach” to rate reductions. “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,” Bailey said.
Economists had previously predicted that the BoE would lower rates four times next year, but financial markets have since adjusted their expectations. Wage growth, which has been stronger than anticipated, has led to a reduction in the number of expected cuts, with markets now forecasting just two rate reductions.
The Bank of England has been more cautious about rate cuts compared to its counterparts in the U.S. Federal Reserve and the European Central Bank. The BoE has only lowered rates by half a percentage point this year, while other central banks have been more aggressive in their easing policies.
The central bank’s latest economic data shows that British consumer price inflation rose to 2.6% in November, higher than the Bank’s forecast and the highest among the Group of Seven (G7) leading economies. The Bank warned that headline inflation is expected to remain slightly elevated in the short term.
In addition to concerns about inflation, the BoE has lowered its growth forecast for the final quarter of 2024 to zero, down from a 0.3% projection just six weeks ago. The British economy contracted in both September and October, marking the first back-to-back monthly declines since 2020. Business sentiment has also worsened, particularly after Finance Minister Rachel Reeves announced a £25 billion tax hike for employers in her October budget.
Policymakers in favor of keeping rates on hold pointed out the uncertainty surrounding the impact of higher taxes and costs, which could either drive inflation or lead to job losses and slower wage growth. They argued that a gradual approach to reducing policy restrictions was appropriate given these risks.
On the other hand, the three members who called for rate cuts expressed concerns that maintaining a “very restrictive” policy could push inflation too far below the BoE’s 2% target and create excess economic slack in the medium term.
