Despite inflation continuing to be a headache for the Bank of England, leading it to hold interest rates today, the central bank may end up being forced to make more cuts than it would like in 2025 to salvage the UK economy.
While today’s decision from Andrew Bailey’s Monetary Policy Committee to hold rates had been widely expected, such a split vote was not.
Analysts had expected only arch-dove Swati Dhingra to vote for a cut, but she was also joined by deputy governor Dave Ramsden and Alan Taylor.
“We believe that this is intended to send a signal, with several policy setters willing to increase the pace of cuts from quarterly, that the current market pricing is not capturing the Bank’s current base case,” said Jamie Niven, senior fixed income fund manager at Candriam.
The news that UK GDP was no longer forecast to grow at all in the last quarter of 2023, down from the 0.3 per cent expected last month, was likely enough for the three Monetary Policy Committee members to think that economic growth needed to be prioritised over inflation.
“The problem now as we head into 2025 is the UK economy is looking in an increasingly perilous position,” said Derrick Dunne, chief executive of YOU Asset Management.
On average, economists expect the UK’s GDP to grow just 1.3 per cent next year, and the three pro-cut MPC members cited “sluggish demand” and a weak labour market in their vote.
“The three members who voted for a cut now may be proved right, for the risk is that the six who voted to keep rates unchanged are focusing too much of the recent spate of higher than expected inflation figures, and not enough on the weak growth data,” said Guy Stear, head of developed markets strategy at Amundi Investment Institute.
The Bank paid particular attention to October’s Budget, saying that the fiscal event’s hike in employer National Insurance contributions was “weighing heavily on sentiment” among businesses.
“The rise in National Insurance Contributions might translate into lower employment rather than higher prices,” added Stear.
Markets are now pricing in over a 50 per cent chance of a cut at the Monetary Policy Committee’s next meeting in February.
The Bank of England’s decision came a day after the US Federal Reserve signalled it would slow the rate of cuts in 2025 due to fears over persistent inflation.
The Fed’s summary of economic projections indicated it would only make two rate cuts throughout 2025, down from four in September, sending markets into a panic.