The Bank of England has opted to maintain interest rates at 3.75% in a widely expected move.
The decision from the nine Monetary Policy Committee members was extremely tight, however, with the vote 5-4 in favour of holding. The hold comes despite inflation rising to 3.4% in December, while the latest UK jobs data also showed signs of a slowing economy.
Back in December, the BoE had said further cuts would be “gradual” after reducing rates from 4%. However, the market has priced in two interest rate cuts for later this year.
Despite the latest GDP figures beating forecasts with a 0.3% growth for November, growth expectations have been marked down, while unemployment is expected to rise slightly more than previously expected.
Quintet Private Bank CIO Daniele Antonucci said this backdrop means the MPC’s Policy Committee’s divide is now chiefly about timing.
“Some members want to keep policy tight a little longer to avoid premature easing; others see growing risks of undershooting as the economy slows. The close vote suggests the balance is tilting, and future decisions will likely be finely judged.”
Todd Cutting, head of enhanced liquidity and senior portfolio manager at Aviva Investors, said today’s decision suggests that the bar for easing interest rates remains higher than the economic data alone might imply, despite the cooling jobs market.
“The message is one of cautious discipline: acknowledging softness, but signalling that it is not yet soft enough to shift the policy stance,” he said.
“The standout phrase for today is that this remains a soft jobs backdrop, not a soft stance. The MPC appears intent on maintaining a line that keeps expectations anchored and prevents markets from getting ahead of the evidence on inflation.
“The tone reinforces that any future recalibration will depend on a broader and more durable disinflation trend, not isolated indicators of slack.”
See also: Bank of England holds rates at 3.75% in narrow 5-4 vote
Wealth Club chief investment strategist Susannah Streeter said the closer-than-expected voting split puts a potential cut in March into focus.
“The labour market is showing weakness, Budget changes are set to bring down energy and transport costs and a wave of cheaper Chinese goods are heading this way,” she said. So, more policymakers could well be swayed to vote for lower borrowing costs next month.
“But these are volatile times, with the overall outlook in a state of flux, given ongoing geopolitical tensions, erratic US trade policy, and a tech sell off roiling markets. So, the Bank’s decision makers will still want more clarity on what could be ahead, before tinkering with borrowing costs again.‘’
