The Financial institution of England retains rates of interest on maintain, however the cut up vote surprises markets

The Bank of England in December 2024.

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LONDON – The Bank of England ended its final meeting of the year on Thursday by deciding to leave interest rates unchanged after inflation in the United Kingdom rose to an eight-month high.

Analysts had broadly expected a rate peg at the December meeting as policymakers remained concerned about stubborn service sector inflation and wage growth.

The BOE has already increased its key interest rate by two quarter percentage points this year from 5.25% to 4.75%.

Contrary to expectations, three members of the Monetary Policy Committee voted to cut interest rates, while six voted to maintain them. Economists polled by Reuters had predicted only one member would vote for a cut.

Sterling gave up gains against the US dollar immediately after the BOE announcement, trading 0.25% higher at 12:40 p.m. The greenback staged a broad rally on Wednesday after the Federal Reserve cut interest rates by a quarter point but signaled a more hawkish outlook for 2025. There were some gains on Thursday morning.

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GBP/USD.

In a statement, the BOE said the rise in UK headline inflation in November was slightly higher than previously expected to 2.6%, adding that inflation in the services sector remained “elevated”.

BOE officials also lowered their economic forecast for the fourth quarter of 2024, now forecasting no growth, compared to the 0.3% expansion forecast in the November report.

UK growth figures have been weaker than expected in recent months, with the economy posting a surprise 0.1% contraction in October.

Money markets this week trimmed their bets on the pace of further cuts next year following the release of data on inflation and wage growth in the summer, now pricing in around 50 basis points of impending cuts, compared to the forecast of around 70 basis points. Value of cuts on Monday.

“More divided than ever”

“The split vote and the dovish tone of the minutes suggest that a rate cut in February remains in play, if not a done deal,” Suren Thiru, economics director at the Institute of Chartered Accountants in England and Wales, said in an email. Emailed comments.

“The Bank of England risks putting itself in a corner over the pace of monetary easing because, with inflation likely to rise, the timing of future rate cuts could become increasingly complex, particularly if fears of stagflation become a reality.”

Matthew Ryan, head of market strategy at Ebury, said BOE officials were “more divided than ever” over the path forward for interest rates, with the doves focused on the fragile UK economy while the hawks united on the recent rise in inflation preferred a step-by-step approach. The UK's current budget and the threat of escalating trade tensions under US President Donald Trump next year are also seen as inflation risks, Ryan said.

Borrowing costs in the UK were higher following Thursday's announcement as yields rose 10-year government bonds up 4 basis points to 4.596%. Government bond yields were in focus this week as the UK's risk premium over Germany hit its highest level since 1990. German bond yields also rose on Thursday, with the yield on 10-year Bunds – the euro zone's benchmark – jumping 5 basis points.

The European Central Bank last week cut interest rates by a quarter point for the fourth time this year, signaling its firm intention to ease monetary policy further in 2025.