Most economists polled by Reuters last week had predicted a 6-3 decision by the MPC to leave bank rates unchanged.The MPC saw a greater risk of weaker demand in the economy, while the chance of inflation becoming stuck too high had diminished, the central bank said.
Although Bailey was among those who decided to keep borrowing costs unchanged, he was the only one of the five who felt that overall inflation risk had declined.
He said the inflation outlook was at a “quite important juncture” but he felt there was “value in waiting for further evidence” of coming economic developments this year. Deputy Governors Sarah Breeden and Dave Ramsden were in the minority of the four who sought a rate cut. The pound lost about a third of a cent against the US dollar before recovering, and short-term UK government yields fell a relatively modest two basis points after the announcement.
The MPC’s next tariff decision will be announced on December 18.
“Key figures on inflation and the labor market, alongside greater clarity on fiscal policy after the budget, are likely to be enough to convince a majority of MPC members to vote for a rate cut,” said Yael Selfin, chief economist at KPMG UK.
Deutsche Bank’s chief British economist Sanjay Raja said he also believed the BoE would cut rates next month and cut the bank rate further to 3.25% by the summer.
“The big question now is whether there is enough easing in the data to support a faster bank rate cut in the first half of next year,” Raja said.
BOE SAYS UK inflation has peaked
Britain’s inflation rate of 3.8% remains the highest in the Group of Seven major advanced economies and the BoE’s key interest rate is double that of the European Central Bank, compounding the challenge for the government to accelerate the economy.
However, inflation remained unexpectedly stable in September and recent employment data also pointed to weakening price pressures.
The MPC said it believed inflation had peaked and would decline in the October and November figures as weaker economic growth and a deteriorating labor market took their toll on demand.
“We still think rates are moving gradually downward, but we need to be sure inflation is on track to return to our 2% target before we cut them again,” Bailey said.
Thursday’s decision marked the first pause in the BoE’s already gradual, once-every-three-month pace of rate cuts, starting in August 2024.
The BoE forecast inflation would remain above its 2% target until the second quarter of 2027 – the same as in August – although it forecast inflation would be slightly lower then, at 1.9%, and also flagged weakness in the labor market.
In another sign of its concerns about an economic slowdown, the central bank expressed concern that households would not be able to use their high levels of savings to spend more.
CHANGE GUIDANCE
As part of a broader overhaul of the way it explains its thinking, the MPC has updated its key message on the interest rate outlook.
A line from previous statements that it believed a “gradual and careful approach” to cutting rates was appropriate was replaced with the phrase: “If progress on disinflation continues, bank rates are likely to continue on a gradual downward path.”
The decision to leave interest rates unchanged was no surprise to investors. The pricing of interest rate futures on Wednesday implied only a one-in-three chance of a quarter-point cut.
Bailey said current market prices were close to “a fair description of my current position”.
The 5-4 vote split and signals that Bailey could soon switch sides would likely increase the chances of a rate cut in December.
Investors estimate about a 55% chance of a cut in bank rates next month.
By then, the MPC will have seen the official inflation and employment data for October and November and will know the size of the tax increases widely expected in Finance Minister Rachel Reeves’ budget.
She is expected to announce broad tax increases in her budget on November 26, potentially 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 criticized when UK inflation hit the 11% mark in October 2022.
It predicts economic growth of 1.5% this year, compared with 1.25% in the previous forecast, and 1.2% for 2026. Little has changed from August projections.
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