Bank of England holds interest rates but split vote surprises markets

LONDON – The Bank of England on Thursday ended its final meeting of the year with a decision to leave interest rates unchanged, after UK inflation rose to an eight-month high.

Analysts had widely expected interest rates to be held at the December meeting, as policymakers remain concerned about stubborn services inflation and wage growth.

The Bank of England has already raised its key interest rate from 5.25% to 4.75% this year in two moves of a quarter of a percentage point each.

In a deviation from expectations, three members of the Monetary Policy Committee voted in favor of lowering interest rates, while six members supported suspending them. Economists polled by Reuters had expected that only one member would vote in favor of the reduction.

The pound trimmed gains against the US dollar immediately after the Bank of England's announcement, trading 0.25% higher at 12:40 p.m. The dollar saw a broad rise on Wednesday after the US Federal Reserve cut interest rates by a quarter point but signaled a more hawkish outlook for 2025. It gave up some gains on Thursday morning.

In a statement, the Bank of England said the increase in UK headline inflation in November to 2.6% was slightly higher than previously expected, adding that services inflation remained “high”.

Bank of England staff also lowered their economic forecasts for the fourth quarter of 2024, and now expect no growth, compared to the 0.3% expansion expected in the November report.

UK growth figures have been weaker than expected in recent months, with the economy recording a surprise contraction of 0.1% in October.

Financial markets this week trimmed their bets on the pace of additional cuts next year after the publication of data on inflation and wage growth in the summer, and are now pricing the upcoming cuts at around 50 basis points, down from expectations of around 70 basis points. Discount value on Monday.

“The split vote decision and the cautious tone of the meeting minutes suggest that the February rate cut is still a work in progress, if not yet a done deal,” said Suren Thero, director of economics at the Institute of Chartered Accountants in England and Wales. In the comments via email.

“The Bank of England risks putting itself in a dilemma over the pace of policy easing because with inflation likely to rise, the timing of future interest rate cuts could become increasingly complex, especially if fears of stagflation become a reality.”

Matthew Ryan, head of market strategy at Ebury, said Bank of England officials appeared “more divided than ever” over the future path of interest rates, with doves focused on the fragile UK economy, while hawks favored a gradual approach due to the recent rise in inflation. Ryan said the latest UK budget and the threat of escalating trade tensions under US President Donald Trump next year would also be seen as inflationary risks.

UK borrowing costs were higher after Thursday's announcement, with yields holding steady 10-year government bonds Up 4 basis points to 4.596%. British government bond yields were in focus this week, with the UK's risk premium over that of Germany reaching its highest level since 1990. German bond yields also rose on Thursday, with the yield on 10-year bonds – a euro zone benchmark – jumping. By 5 basis points.

The European Central Bank last week cut interest rates by a quarter of a percentage point in its fourth move this year, signaling a strong intention to activate further monetary easing in 2025.