Bank of England Holds Rates Steady Amid Persistent Inflation Pressures

The Bank of England (BoE) opted to maintain its Bank Rate at 4.75% on Thursday, reflecting a cautious approach to monetary easing as inflation pressures continue to challenge the central bank’s medium-term objectives.

Rate Decision Details

Policymakers voted 6 to 3 in favor of leaving rates unchanged, a more decisive stance than the anticipated 7-2 split. This follows the BoE’s decision in November to cut rates by 25 basis points, its second reduction in 2023 after initiating monetary easing in August—the first such move since the pandemic began in 2020.

Inflation Challenges Persist

UK consumer price inflation accelerated to 2.6% in November, up from 2.3% in October, further distancing itself from the BoE’s 2.0% medium-term target. The recent increase in wages—outpacing expectations during the three months to October—has raised concerns about underlying inflationary pressures, signaling potential challenges in achieving price stability.

Macroeconomic Projections

According to analysts at UBS, the BoE’s latest projections suggest that the Autumn Budget could add approximately 0.5 percentage points to inflation, delaying its return to the 2% target until early 2027. This represents a one-year delay compared to the BoE’s August projections.

During the post-meeting press conference, Governor Andrew Bailey emphasized the uncertainty surrounding the Budget’s inflationary impact and the labor market’s potential adjustments. He reiterated the central bank’s commitment to a data-dependent approach, leaving future policy decisions contingent on evolving economic conditions.

Market Expectations

Investors remain cautious about the BoE’s next steps, pricing in just a 50% chance of a rate cut in February 2025. Markets currently expect only two rate cuts in total for 2025, reflecting tempered optimism about the speed of monetary easing.

Outlook

The Bank of England’s decision underscores the delicate balance it must strike between supporting economic growth and containing inflation. With inflationary pressures driven by rising wages and fiscal measures, policymakers are likely to proceed with caution, focusing on data to guide their next steps. Investors will closely monitor upcoming economic indicators to gauge the BoE’s potential trajectory for monetary policy adjustments in 2024 and beyond.