The Bank of England (BoE) maintained its benchmark interest rate at 4.75% in its final policy decision of 2024, despite escalating inflationary pressures. This decision reflects a cautious approach as the UK grapples with economic uncertainty.
The Monetary Policy Committee (MPC), responsible for setting interest rates, voted 6-3 to hold rates steady. Three members advocated for a reduction to 4.5%, highlighting the internal debate within the BoE regarding the optimal course of action. BoE Governor Andrew Bailey emphasized the need for a “gradual approach” to future rate cuts, acknowledging the prevailing economic uncertainties. He reiterated the BoE’s commitment to achieving the 2% inflation target sustainably.
The MPC’s decision was primarily driven by the recent surge in inflation. Consumer Price Index (CPI) inflation climbed to 2.6% in November, up from 1.7% in September, exceeding previous forecasts. This increase was attributed to stronger core goods, food, and sustained services inflation. The MPC anticipates a further slight rise in inflation in the near term. While household inflation expectations have generally normalized, recent indicators suggest a potential uptick.
Current market expectations suggest the BoE will implement only two rate cuts in 2025, bringing the base rate to 4.25% by year-end. Following rate reductions in August and November, there’s considerable uncertainty surrounding the February meeting. Investors currently assign a 70% probability to a rate cut in February. This contrasts sharply with the anticipated more aggressive actions by the US Federal Reserve and the European Central Bank.
Goldman Sachs analysts suggest quarterly rate reductions by the BoE, citing “firmer near-term inflation numbers” and uncertainty regarding the impact of the employer national insurance hike. Nomura analysts predict a long-term settlement of interest rates around 3%-3.5%. Bank of America analysts caution against prematurely committing to sustained rate cuts, emphasizing the need for confirmation that inflation risks are genuinely dissipating.
November’s inflation figures reached an eight-month high of 2.6%, up from 2.3% in October, fueled by Chancellor Rachel Reeves’ £40 billion tax increase announcement in the October budget. Wage growth further contributes to inflationary pressure, currently at 5.2%, a notable increase from 4.9% three months prior.
The BoE acknowledges a decline in most UK near-term activity indicators since the November rate cut. They now assess the labor market as “broadly in balance,” noting a recent surge in private sector average weekly earnings growth, albeit with inherent volatility. Projections for 2025 average pay settlements range from 3% to 4%. Significant uncertainty persists concerning labor market developments.
The decision to hold rates steady maintains borrowing costs for those with variable-rate mortgages. However, individuals with fixed-rate products anticipate rate cuts before their next remortgage. High credit card debt holders will continue to face challenges in the persistent “higher-for-longer” interest rate environment. In contrast, the Federal Reserve recently lowered its rate range by 0.25 percentage points to 4.25%-4.5%, and the European Central Bank implemented its fourth rate cut this year, reducing rates to 3%. The BoE’s decision underscores its unique challenges and its commitment to a measured approach to monetary policy amidst a dynamic economic landscape.
