The Bank of England has held interest rates at 4.75% in the final Monetary Policy Committee (MPC) meeting of the year.
Earlier this week, the Office for National Statistics revealed inflation had risen for a second month in a row to 2.6%, above the BoE’s 2% target.
The decision follows the Federal Reserve’s 25 basis points cut last night, with inflation also ticking up across the Atlantic.
See also: Fed lowers expectations to two rate cuts in 2025
Patrick O’Donnell, senior investment strategist at Omnis Investments, said: “The MPC decided to leave interest rates unchanged today as widely expected and priced by markets. They are in a tricky position because prices pressures are still prevalent, but offsetting this, activity has been weaker in recent months.
“As a result, we expect gradual cuts in 2025 until we get further clarity on either of those two factors. There is currently very little priced by markets currently with ~50bps cuts by the end of 2025. Equity and fixed income markets have been under pressure following on from the hawkish FOMC meeting yesterday evening. This decision won’t be responsible for turning that trend around.”
MPS voting was not unanimous, with three members voting in favour of an interest rate cut. Abrdn economist Felix Feather said this reinforces expectations of a 25bps cut in February.
Looking ahead to next year, Chris Arcari, head of capital markets at Hymans Robertson, expects the BoE to begin to reduce rates to less restrictive levels as the labour market slowly loosens.
“We expect between two and three rate cuts in 2025 – not too dissimilar to swap markets’ expectations. Disinflationary factors such as demographics, technological innovation and globalisation are expected to temper inflation over the medium to long term. However, the risk of a switch to a regime of permanently higher inflation remains elevated.
“While we believe inflation, and interest rates, will decline from current levels and conceivably undershoot their targets, we don’t foresee a longer-term return to the ultra-low-rate environment we saw after the global financial crisis. We expect nominal interest rates to bear a closer relationship to real growth and inflation, and volatility to remain higher, in the coming decade than they did in the last.”
