The Bank of England concluded its final meeting of the year by deciding to keep interest rates unchanged, following a rise in U.K. inflation to an eight-month high. Analysts had widely anticipated this decision due to concerns about persistent services inflation and wage growth among policymakers. The BOE had previously reduced its key rate from 5.25% to 4.75% through two quarter-percentage-point adjustments this year.
Contrary to expectations, three members of the Monetary Policy Committee voted in favor of rate cuts, while six supported maintaining the current rates. This was unexpected as economists surveyed by Reuters had predicted only one member would advocate for a rate reduction. Following the BOE announcement, the British pound initially strengthened against the U.S. dollar but later traded 0.25% higher at 12:40 p.m. The U.S. dollar had experienced a broad rally the day before after the U.S. Federal Reserve cut interest rates by a quarter point but indicated a more hawkish outlook for 2025, losing some gains on Thursday morning.
The BOE noted that U.K. headline inflation had risen to 2.6% in November, slightly exceeding previous expectations, with services inflation remaining high. The BOE also revised its economic forecast for the fourth quarter of 2024, now projecting no growth compared to the 0.3% expansion forecasted in November. Recent U.K. growth figures have been below expectations, with the economy unexpectedly contracting by 0.1% in October.
Money markets adjusted their expectations for future rate cuts this week after new data on inflation and wage growth, now pricing in approximately 50 basis points of cuts compared to the previous outlook of around 70 basis points on Monday. Analysts suggest that a rate cut in February is still a possibility, given the split vote decision and the dovish tone of the minutes.
Following the announcement, U.K. borrowing costs rose, with the yield on 10-year government bonds increasing by 4 basis points to 4.596%. The focus this week has been on gilt yields, as the U.K.’s risk premium over Germany reached its highest level since 1990. German bond yields also rose on Thursday, with the yield on 10-year bunds, the euro zone benchmark, increasing by 5 basis points.
The European Central Bank had reduced rates by a quarter point in its fourth such move of the year the previous week, signaling a clear intention to implement further monetary easing in 2025.
