The Bank of England (BoE) decided to hold its key interest rate at 4.75% in a 6–3 split vote, signaling caution as inflation persists and economic growth stalls.
Despite inflation rising to 2.6% in November, the BoE’s growth forecast for the fourth quarter has been downgraded to 0%, indicating a slowdown.
The decision, widely anticipated by markets, reflects growing concerns over economic momentum. The Monetary Policy Committee (MPC) voted 6–3 to keep rates steady, with three members dissenting, advocating for a 25-basis-point rate cut to 4.5%. This dissent points to a dovish shift within the committee amid worsening economic conditions.
Consumer price inflation (CPI) rose to 2.6% in November, up from 1.7% in September, driven by rising core goods, food prices, and persistent inflation in services. However, the BoE downgraded its GDP growth forecast for the fourth quarter to 0%, a significant reduction from the previous 0.3% estimate.
The MPC reiterated its commitment to a “gradual” and “data-dependent” approach to monetary policy, emphasizing that rates must stay “restrictive for sufficiently long” to prevent inflation from becoming entrenched, particularly in services. Traders responded to the decision with a shift in money markets, interpreting the move as dovish.
The GBP Overnight Index Swap (OIS) curve, which reflects market expectations, now shows a 72% probability of a rate cut at the February meeting, up from 55% before the announcement. Markets are pricing in 22 basis points of easing by the end of Q1 2025, with two 25-basis-point cuts expected in 2025.
As economic momentum slows and risks to the labor market increase due to changes in National Insurance, analysts, like Brown, warn that the risks are “tilted towards a more dovish outcome.” Yields on 2-year gilts fell by 4 basis points, while the 10-year gilt yield dropped below 4.6%. The British pound weakened slightly, falling from $1.2650 to $1.2600, while the FTSE 100 rose 0.4%, reflecting optimism about a potential shift towards looser monetary policy.
