[LONDON] The Bank of England kept borrowing costs on hold on Thursday (Nov 6) but a narrow vote and signs that governor Andrew Bailey might soon join those seeking a rate cut keeps the door open for a move after the government’s budget later this month.
Mindful of Britain’s still high headline inflation rate, the nine-strong Monetary Policy Committee voted 5-4 to keep the central bank’s benchmark Bank Rate at 4.0 per cent, the BOE said.
Most economists polled by Reuters last week had predicted a 6-3 decision by the MPC to leave Bank Rate unchanged.
While Bailey was among those who decided to keep borrowing costs unchanged, he was the only one of the five who felt that overall inflation risks had moved down. However, he felt there was “value in waiting for further evidence” of this in upcoming economic developments this year, the BOE said.
Britain’s inflation of 3.8 per cent remains the highest among the Group of Seven major advanced economies and the BOE’s benchmark interest rate is double the European Central Bank’s, adding to the challenge for the government to speed up the economy.
However, inflation unexpectedly held steady in September and recent jobs data has also hinted at weakening price pressures.
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The MPC said it believed inflation had peaked and would fall in data for October and November as weaker economic growth and a worsening jobs market took their toll on demand.
“We still think rates are on a gradual path downwards, but we need to be sure that inflation is on track to return to our 2 per cent target before we cut them again,” Bailey said.
Thursday’s decision represented the first pause in the BOE’s already-gradual, once-every-three-months pace of rate cuts which started in August 2024.
The BOE forecast that inflation would remain above its 2 per cent target until the second quarter of 2027 – the same as in August – although it did forecast inflation would be slightly lower then, at 1.9 per cent, and also flagged the weakness in the jobs market.
In another sign of its worries about an economic slowdown, the central bank expressed concern that households might not use their high levels of savings to spend more.
As part of a wider overhaul of how it explains its thinking, the MPC tweaked its key message about the outlook for rates.
A line from previous statements that it thought “a gradual and careful approach” to cutting rates was appropriate was replaced by the phrase: “If progress on disinflation continues, Bank Rate is likely to continue on a gradual downward path.”
The decision to keep rates on hold was not a surprise to investors. Pricing of interest rate futures on Wednesday had implied only a one-in-three chance of a quarter-point cut.
Bailey said that current market pricing was close to “a fair description of my position at present”.
However the tight 5-4 vote split and the signs that Bailey might soon switch camps was likely to boost bets on a rate cut at the MPC’s next meeting in mid-December.
Investors on Wednesday were pricing a roughly 60 per cent chance of a reduction in Bank Rate next month.
By then, the MPC will have seen official inflation and jobs data for October and November and it will know the extent of tax increases which are widely expected in finance minister Rachel Reeves’ budget.
She is expected to announce broad tax increases in her budget on November 26, possibly weighing on the economy.
For the first time the BOE published summaries of the views of individual MPC members as part of a revamp of its forecasting process and the way it explains its thinking after being widely criticised when British inflation topped 11 per cent in October 2022.
It forecast economic growth of 1.5 per cent for this year, up from 1.25 per cent in its previous forecast, and 1.2 per cent for 2026, little changed from the August projections. REUTERS
