The Bank of England signaled it would continue to gradually ease monetary policy through to 2025, even as a growing number of officials brushed aside evidence of persistent inflation in favor of an immediate cut in borrowing costs.
According to the minutes of the meeting released this month, the Bank of England's Monetary Policy Committee maintained the base rate at 4.75% by a vote of 6 to 3.
Deputy Governor Ramsden and the Bank of England's newest rate setter, Taylor, changed their stance and joined Dhingra in arguing for a rate cut. Economists did not expect so many officials to support a rate cut. They believe that weak demand creates a risk of a large output gap, while CPI is well below 2% in the medium term. The pound fell against the dollar in response.
"We believe that a gradual approach to future rate cuts remains the right one," Bank of England Governor Andrew Bailey said in a statement. "But given the high level of economic uncertainty, we cannot commit to when or how much we will cut rates next year."
Analyst Irina said the Bank of England was making a bold move by sticking to its gradual guidance, which suggested a pace of quarterly rate cuts that was inconsistent with market bets.
As Trump prepares to return to the White House in January, the Bank of England pointed to risks such as geopolitics and trade, as well as the impact of the Labour government's recent budget. Officials painted a picture of stagflation, predicting that economic growth will be flat in the fourth quarter. The decision makes the Bank of England more dovish than the Federal Reserve.
British officials, who stuck to their guidance of “gradual” rate cuts and meeting-by-meeting reviews, did note the growing risk of sticky prices after an unexpected surge in wage growth and inflation rose to an eight-month high this week.
That prompted investors to reduce bets on how much the Bank of England will cut rates next year, including slashing the chance of a February rate cut to just 50%.
Even so, the change in voting results suggests that the data has not yet stopped the Monetary Policy Committee from continuing to cautiously ease monetary policy at a quarterly pace, restraining the economy while guarding against inflation threats growing at home and abroad.
British officials have now cut borrowing costs by 50 basis points after 14 straight rate hikes, and traders are pricing in two more 25 basis point cuts from the BoE in 2025. Before this week’s data, Bailey had suggested a gradual approach would mean four rate cuts next year.
Policy differences with the more dovish European Central Bank, which is firmly on a path of steady rate cuts, prompted investors to push sterling to its highest closing level against the euro in more than eight years last week.
Regarding the ongoing threat of inflation, the Bank of England's meeting minutes noted that risks are two-way, weighing both weaker growth signals and stubborn domestic price pressures.
After recent disappointing economic activity data, Bank of England officials cut their forecasts for the fourth quarter, predicting zero growth, compared with their previous forecast of 0.3% growth.
Article forwarded from: Jinshi Data