London — The Bank of England cut interest rates on Thursday though four of its nine policymakers sought to keep borrowing costs on hold, suggesting the central bank’s run of rate cuts might be nearing an end.
Difficulty in reaching an agreement meant the Monetary Policy Committee (MPC) held two votes for the first time in its history.
With the MPC facing the conflicting risks posed by an inflation rate that the bank forecasts will soon be double its 2% target and a worsening of job losses, Governor Andrew Bailey and four colleagues backed lowering the Bank Rate to 4% from 4.25%.
But that was only after a first round of voting ended in a 4-4-1 split, with external MPC member Alan Taylor initially backing a half-point cut.
“It remains important that we do not cut the Bank Rate too quickly or by too much,” Bailey said after the decision, highlighting that the central bank still expects recent higher levels of inflation to be short-lived.
“We stand ready to adjust our course if we see shifts in the balance of risk to the medium term outlook for inflation.”
The four members of the MPC who backed keeping rates on hold included Clare Lombardelli, the deputy governor for monetary policy, who broke from the majority for the first time. Chief economist Huw Pill also voted to keep the rate at 4.25%.
‘Gradual approach’
British government bond yields rose and stocks fell after the announcement. Sterling jumped by about half a cent against the dollar.
Investors trimmed their bets on the possibility of another rate cut by the end of 2025 and were only fully pricing in a cut to 3.75% in February next year, according to data from LSEG.
“The close vote split and the minutes of the meeting underscore the division on the MPC,” said Yael Selfin, KPMG UK’s chief economist. “The division reflects the two-sided risks to the inflation outlook and the uncertainty under which policymakers are operating.”
Selfin said she expected a final rate cut in November.
The central bank repeated its guidance about “a gradual and careful approach” to further cuts in borrowing costs but added a new line to its message on the outlook.
“The restrictiveness of monetary policy had fallen as Bank Rate had been reduced,” it said, no longer directly saying that policy was still restrictive. It repeated that there was no preset path for borrowing costs.
A halt to cutting rates would be a blow for finance minister Rachel Reeves and Prime Minister Keir Starmer, who have struggled to meet their promise to voters to speed up sluggish economic growth.
Bailey said in a statement the decision to cut rates for the fifth time since August last year was “finely balanced” though he thought they were still on a downward path.
“But any future rate cuts will need to be made gradually and carefully,” Bailey said.
Thomas Pugh, chief economist at audit, tax and consulting firm RSM UK, said that while the bank’s quarterly rate-cutting path remained intact “the chances have risen sharply that this was the last interest rate cut of the year”.
Path unclear
The central bank is being pulled in different directions, leaving analysts as well as its policymakers divided on its most likely moves in the coming months.
Britain’s job market has weakened in recent months, in part due to a tax hike by Reeves on employers and US President Donald Trump’s trade war.
Still, inflation is rising. The bank revised up its forecast for a peak in inflation to 4% in September from 3.7% and said it would remain alert to the risk that rising prices — especially for food — could push up wage deals and longer-term price pressures.
“Overall, the MPC judges that the upside risks around medium-term inflationary pressures have moved slightly higher since May,” the summary of the meeting said.
The bank said it expected inflation to return to its 2% target only in the second quarter of 2027, three months later than its previous forecast.
By contrast, the European Central Bank expects inflation in the eurozone to hold below 2%. It has cut borrowing costs eight times since June last year, three more than those of the Bank of England.
Inflation has been above the bank’s 2% target almost constantly since May 2021.
It said on Thursday it expected economic growth of 0.3% in the three months to end-September, up from 0.1% in the second quarter. Longer-term growth forecasts were little changed from its report in May, with annual growth of just over 1% expected in the coming years.
Reuters
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