The Monetary Policy Committee voted 6-3 to keep its key policy rate at 5.25% for the third consecutive meeting, according to minutes of the decision released Thursday. Policymakers split along the same lines as in their previous meeting in November, with three still supporting a hike.
The panel maintained its guidance that rates would need to be “sufficiently restrictive for sufficiently long” to rein in inflation. That stood in stark contrast with fresh signals from the Federal Reserve that US policymakers were preparing to ease rates next year.
Governor Andrew Bailey said in a statement released alongside the decision that “there is still some way to go” in the fight to control inflation. The MPC repeated its guidance that it could hike again “if there were evidence of more persistent inflationary pressures,” with price growth still more than double the 2% target.
Economists believe the UK economy is flirting with a recession as the cost-of-living crisis and aggressive monetary tightening by the BOE take their toll, a bleak prospect for Prime Minister Rishi Sunak ahead of a general election expected to be held next year. The BOE now expects GDP to be flat in the fourth quarter of 2023 after the economy shrank in October, a downward revision from the 0.1% quarterly growth expected in its November forecasts.
Chancellor of the Exchequer Jeremy Hunt said in a letter to Bailey that the bank continued to have his “full support” in its fight against inflation. The central bank said that Hunt’s Autumn Statement — which included a tax cut for workers and permanent full expensing for businesses — will boost the level of GDP by 0.25% over the coming years but also lift supply.
“We have turned a corner in our fight against inflation and real wages are rising, but we must keep driving inflation out of the economy to reach our 2% target,” Hunt said in a statement after the decision. “By cutting taxes for hard working people and businesses, and helping people into work, we are forecast to deliver the largest boost to potential GDP on record.”
The European Central Bank is due to release its own monetary policy decision at 1:15 p.m. London time. Markets see a first ECB cut as early as the spring.
While Bailey has previously insisted that it was too early to discuss a loosening in policy, investors ramped up bets on interest rate cuts in the run-up to Thursday’s meeting. Speculation over a pivot has built after sharp falls in inflation and growing evidence that the most aggressive rate-hiking cycle in decades is weighing on the economy.
Markets priced in 1.25 percentage points of cuts in 2024 on Thursday for the first time, with the move to easier policy expected to begin in May. That shift was accelerated by a more dovish stance from Fed policymakers who projected an end to its rate hikes and more aggressive cuts in 2024.
The pound extended gains against the US dollar while gilt yields trimmed an earlier decline. Traders pared their bets on BOE rate cuts next year which had been fueled by the Fed’s dovish pivot late Wednesday. Investors now see around 110 basis points of monetary easing in the UK in 2024 compared to 117 basis points before the BOE’s announcement.
“We’ve come a long way this year, and successive rate increases have helped bring inflation down from over 10% in January to 4.6% in October,” Bailey said. “But there is still some way to go. We’ll continue to watch the data closely, and take the decisions necessary to get inflation all the way back to 2%.”
The members calling for higher rates were Catherine Mann, Megan Greene and Jonathan Haskel.
The rate-setters said the near-term path for inflation was “somewhat lower than projected” in November and noted “downside news” in private sector wage growth. However, it warned against over-interpreting the wage data and said there were upside risks for pay, including the planned increase in the National Living Wage.
It also cautioned that it is “too early to conclude that services price inflation and pay growth were on a firmly downward path.” Policymakers are concerned about tight labor market fueling persistent inflation with annual wage growth still running at above 7%. Britain still has the highest inflation among Group of Seven nations.