In a critical end to its 2024 monetary policy deliberations, the Bank of England (BoE) opted to keep interest rates steady, even as the United Kingdom grapples with its highest inflation levels in months. This decision underscores the balancing act the BoE faces as it attempts to navigate between curbing inflation and supporting a slowing economy. However, the split within the Monetary Policy Committee (MPC) highlights growing discord among policymakers over the appropriate path forward.
Headline inflation surged to 2.6% in November, the highest rate since the beginning of the year and slightly above the BoE’s earlier forecasts. This increase, driven largely by persistent cost pressures in the services sector, has complicated the central bank’s efforts to signal a clear direction. The decision to hold rates at 4.75% reflects a cautious approach, particularly after two 0.25% reductions earlier in the year. Yet, the voting patterns of the nine-member MPC revealed significant divisions, with three members favoring an immediate rate cut while the remaining six opted for no change. This level of dissent is striking, as most economists had predicted just one vote for a rate reduction.
The implications of this internal split were felt across financial markets. Sterling initially pared its gains against the U.S. dollar following the announcement, rising 0.25% by midday trading. The pound’s movements came on the heels of a broader dollar rally earlier in the week, fueled by the Federal Reserve’s own quarter-point rate cut and signals of a more hawkish approach for 2025. These global monetary policy shifts have intensified scrutiny on the BoE’s next moves, with markets now pricing in reduced expectations for rate cuts next year. Initial forecasts of 70 basis points in cuts have been scaled back to around 50 basis points as policymakers signal caution amid uncertain conditions.
Economic forecasts have also been downgraded, painting a bleaker picture for the final quarter of the year. The BoE now projects no growth for Q4 2024, a significant reduction from the 0.3% expansion forecasted just a month earlier. October’s unexpected 0.1% contraction further underscores the challenges facing the U.K. economy, which is teetering on the brink of stagnation. Services inflation remains particularly problematic, with sustained pressures from wage growth and input costs making it harder for businesses and households alike.
Expert opinions have illuminated the challenges confronting the BoE. Suren Thiru, economics director at the Institute of Chartered Accountants in England and Wales, emphasized that the dovish tone of the meeting minutes keeps a February rate cut firmly on the table. However, Thiru cautioned that the BoE’s options could become increasingly constrained if inflation persists or stagflation emerges as a credible threat. Matthew Ryan, head of market strategy at Ebury, characterized the MPC as “deeply divided” over the path forward. While dovish members of the committee have focused on the fragility of economic growth, hawkish members remain concerned about the inflationary risks posed by a strong services sector and tight labor market.
Bond markets responded predictably to the BoE’s decision, with gilt yields rising four basis points to 4.596%. This increase reflects heightened risk premiums, which have placed the U.K. at its widest spread over German bonds since 1990. Meanwhile, yields on Germany’s benchmark 10-year bunds climbed by five basis points, reflecting broader concerns across European markets. The European Central Bank’s recent quarter-point rate cut—its fourth of the year—signals that monetary easing remains a priority across the continent, further complicating the BoE’s efforts to strike the right balance.
As the BoE grapples with these conflicting pressures, its decisions will remain under intense scrutiny from markets, policymakers, and businesses. The path forward is far from clear, and the stakes for the U.K. economy could not be higher.
