Market News

By Tom Rees

(Bloomberg) -- The Bank of England acted to counter market speculation on fewer cuts in borrowing costs, with three officials seeking an immediate reduction and the rest insisting they won’t slow down easing. 

Deputy Governor Dave Ramsden and Alan Taylor — the BOE’s newest policymaker — switched sides to join Swati Dhingra in advocating a quarter-point move this month. The majority opted to keep the benchmark interest rate at 4.75%, but reiterated their plan to deliver reductions in 2025.

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

The decision sought to reverse a tide of repricing toward less BOE easing next year in the wake of data this week showing stronger-than-expected wage growth and still-stubborn inflation. The dovish tone was all the more marked in contrast to the US Federal Reserve, which renewed its focus on price risks on Wednesday.

The BOE vote split and Bailey’s remarks prompted investors to add to bets for reductions in 2025. Money-market pricing implied two quarter-point cuts and a strong chance of a third. Gilt yields dropped relative to where they were before the decision, while the pound trimmed earlier gains to trade around $1.26.

The combination of the vote outcome and the BOE’s vow to ease gradually “seems to be a tacit pushback against the recent shift in market pricing to just two rate cuts next year,” said Thomas Pugh, an economist at RSM UK.

What Bloomberg Economics Says...

“We see the next move down in February and 100 basis points of cuts in 2025, taking rates to a more neutral level. The room to go significantly further without fanning inflationary pressure is limited.”

—Dan Hanson, chief UK economist. For his BOE REACT, click here

With Donald Trump poised to re-enter the White House in January, officials specified geopolitics and trade among the risks, along with the impact of the Labour government’s recent budget. Their description pointed to a stagflationary picture, with economic growth now expected to be flat in the fourth quarter — compared with their prior forecast for 0.3% expansion.

Chancellor of the Exchequer Rachel Reeves said that she “fully” backed the bank’s efforts to tame prices, even though it passed up another chance to cut borrowing costs. 

While BOE officials stuck with their guidance for gradual rate cuts and a meeting-by-meeting approach, they did note a growing risk of sticky prices. 

Even so, they appeared to dismiss the surprise on wage growth in this week’s data, saying it “tended to be more volatile” than other pay indicators. They also said the labor market is now “broadly in balance,” hinting at a need to continue dialing back the restrictiveness of policy.

That would leave the MPC on track to continue with its cautious once-a-quarter pace to easing, removing constriction on the economy while guarding against inflation threats brewing at home and abroad. 

The minutes referred to one rate-setter who held policy steady, preferring an “activist strategy” that suggests they would vote for large cuts if they became convinced inflation has been tamed. It’s likely this is the BOE’s most hawkish rate-setter Catherine Mann, who has repeatedly touted her activist approach.

“The split vote decision and the dovish tone of the minutes suggest that a February interest-rate cut remains very much in play, if not yet a done deal,” said Suren Thiru, economics director at the Institute of Chartered Accountants in England and Wales.

After 14 back-to-back hikes, UK officials have lowered borrowing costs by just half a percentage point so far. Bailey previously hinted that a gradual approach implied four cuts next year, an outlook thrown into question by this week’s speculation on fewer reductions. 

That pricing might show doubt on the BOE’s rhetoric about borrowing costs, but other market indicators still suggest traders have faith in its ability to deliver on its mandate. 

UK wage and consumer-price data did appeared to point to more pressures, but inflation expectations as measured by breakeven rates and swaps have edged lower. There’s consistency to such moves, because if officials were to slow the pace of rate cuts, that would show more commitment to their mandate.

Such a scenario could increase the divergence between the policy of the BOE and of the European Central Bank, according to Yael Selfin, chief economist at KPMG UK.

“The MPC’s ability to ease interest rates next year will be constrained by the challenging inflation backdrop, in addition to the expected pickup in economic activity,” she said. “This will put the BOE in a unique position relative to its counterparts in Europe, particularly the ECB, where a weakening growth outlook increases the urgency to cut rates.”

--With assistance from Philip Aldrick, Greg Ritchie, Constantine Courcoulas, Julian Harris and James Hirai.