Bank of England leaves interest rates unchanged

In its last meeting of the year, the Monetary Policy Committee voted by a majority of six to three to leave the cost of borrowing unchanged.

The MPC has trimmed rates twice this year, each time by a quarter point, after record inflation eased significantly.

However, it still remains above the BofE's long-term target of 2%, rising for the second consecutive month in November to 2.6%.

In particular, the MPC has long-flagged concerns about sticky service sector inflation, which stood at 5.0% last month. When it last cut rates in November, the committee signalled then that another reduction was unlikely before 2025.

The MPC is facing a tricky balance. While inflationary pressures remain, so the labour market and consumer confidence is showing signs of softening. GDP has now shrunk for two consecutive months.

In the minutes accompanying Thursday’s rate decision, the committee acknowledged recent data pointing to “sluggish demand and a weakening labour market, now and in the year ahead, both of which would see further downwards pressure on demand, wages and prices”.

While six members backed leaving rates unchanged, including governor Andrew Baily and chief economist Huw Pill, three voted for a quarter point cut. They were Swati Dhingra, Dave Ramsden and Alan Taylor.

The minutes concluded: “A gradual approach to removing monetary policy restraint remained appropriate.

“Monetary policy would need to continue to remain restrictive for sufficiently long until the risks to inflation returning sustainably to the 2% target in the medium term had dissipated further.”

Laith Khalaf, head of investment analysis at AJ Bell, said: “As inflationary forces gather, the BofE isn’t going to be a gung-ho about cutting interest rates. Nonetheless, the fact three members voted to cut Bank Rate is a dovish signal which markets will likely respond to.

“No one is expecting inflation to rise to double digits again, but sticky inflation still limits the capacity of BofE to cut rates. That’s going to keep borrowing costs elevated for companies, dampening the prospects for economic growth. It also lessens the chance of UK savers stepping outside the familiar walls of cash savings accounts and investing in the UK stock market.”

Susannah Streeter, head of money and markets at Hargreaves Lansdown, said: “The door is still open to cuts, as this was not an unanimous decision. However, they are expected to be few and far between next year, with the markets pricing in just two interest rate cuts.”

However, Francesco Pesole, FX strategist at ING, said: “The MPC is explicitly refusing to commit to the size and timing of rate cuts in 2025. This follows the latest slew of data, which showed an acceleration in wage growth and sticky services inflation.

“What slightly surprised markets was the close vote. Our expectations, and probably that of the market, was that only arch-dove Dhingra would have voted for cut.

“The apparent growing dovish front within the MPC, in spite of the latest hawkish wage data, potentially suggests a greater focus on slowing activity.

“That reinforces our dovish view on the BofE for the next year: we expected 150bps of cuts, against market expectations of around 55bps.”