Bank of England holds interest rates at 4.75%

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The Bank of England has kept interest rates on hold at 4.75 per cent as it seeks to contend with both stubborn inflation and lacklustre growth.

In a split decision, most members of the Monetary Policy Committee warned that recent increases in wages and prices had “added to the risk of inflation persistence”, dampening hopes of rapid rate cuts in 2025.

“We think a gradual approach to future interest rate cuts remains right,” said Andrew Bailey, BoE governor. “But with the heightened uncertainty in the economy, we can’t commit to when or by how much we will cut rates in the coming year.”

He added that the BoE needed to make sure it could meet its “2 per cent inflation target on a sustained basis”.

The MPC’s decision, which was in line with forecasts from economists polled by Reuters, comes a day after data showed that UK inflation rose to 2.6 per cent last month from 2.3 per cent in October.

But three out of the nine MPC members — deputy governor Dave Ramsden, Alan Taylor and Swati Dhingra — voted for a quarter-point reduction because of sluggish demand and a weaker labour market.

BoE staff now expect zero growth in the final quarter of this year, weaker than forecast in November.

“Most indicators of UK near-term activity have declined,” the central bank said on Friday.

It added that risks to global growth and inflation from geopolitical tensions and trade policy uncertainty had “increased materially” — an apparent reference to US president-elect Donald Trump’s plans to increase tariffs on imports to the US.

Sterling and gilt yields fell slightly after the widely expected hold. The pound dipped to $1.260 after the BoE’s announcement, though it was still up 0.2 per cent on the day.

The yield on rate-sensitive two-year government bonds fell slightly to 4.46 per cent. 

Traders still expect the BoE to make two quarter-point cuts next year — the same as immediately before Thursday’s decision.

“The voting was more dovish than the market was expecting, suggesting it has gone too far recently to price out rate cuts for next year,” said Lee Hardman, MUFG’s senior currency analyst.

The market’s current expectation of two quarter-point rate cuts next year compares with the four it expected as recently as October.

The BoE cut rates by a quarter point at its previous meeting in November, but signalled at the time that another cut was unlikely until 2025. It has cut rates twice in 2024.