The Bank of England left its key interest rate unchanged at 4.75 percent on Thursday, saying it will need to keep the brakes on the U.K. economy for a while yet, despite signs of a slowdown in the last months of the year.
However, three of the nine-strong Monetary Policy Committee voted for a quarter-point cut to 4.5 percent, pointing to recent evidence that the economy is struggling. If unaddressed, they argued, this could lead to unnecessary harm further down the road.
Despite acknowledging that “most indicators of U.K. near-term activity have declined,” the Bank argued that a “gradual approach to removing monetary policy restraint remains appropriate.” In its statement, it stuck to familiar language that monetary policy “will need to continue to remain restrictive for sufficiently long until the risks to inflation returning sustainably to the 2 percent target in the medium term have dissipated further.”
Inflation has come down sharply from a peak of over 11 percent in 2022, but the Bank has struggled to squeeze remaining prices pressures out of the system this year. A temporary dip in the headline rate in summer was due largely to statistical quirks, and inflation is now back at 2.6 percent, having accelerated for the last two months.The picture looks considerably worse when stripped of volatile factors such as food and energy, with the core rate of inflation rising to 3.5 percent.
This week alone, the Bank has suffered two setbacks: before November’s inflation data yesterday, the Office for National Statistics had already published figures showing that wage growth — a key component of domestic inflation — accelerated for the first time since July last year in the three months through October.
In its statement, the Bank said it expected headline inflation to continue rising in the near term, but said it still expects wage growth will slow to a more palatable range of 3 and 4 percent next year. After running hot since the end of the pandemic, the labor market is now judged by the Bank to be broadly in balance.
That balance faces a stern test next year, when another big rise to the National Living Wage and a sweeping expansion of employers’ National Insurance obligations will come into effect. The Bank estimates the government’s October budget will add 0.75 percent to the economy over the next 12 months, but it will also keep inflation just under half a percentage point higher than it would otherwise have been.
Companies such as Marks & Spencer and Sainsbury’s have warned of a big hit to their profits, with possible price increases as a result. However, the three dissenters appeared persuaded that the economy, under the influence of an uncertain international backdrop, will be too weak to let companies get away with such price hikes.
“The most recent data developments [point] to sluggish demand and a weakening labour market, now and in the year ahead, both of which would see further downward pressure on demand, wages, and prices,” the Bank said in a summary of the three doves’ arguments.
Two external members of the MPC — Swati Dhingra and Alan Taylor — dissented, as did Deputy Governor for Markets Dave Ramsden. Financial markets had expected at most only one vote for a cut, and the pound lost around a third of a cent against both the euro and the dollar in response to the news, as traders priced in a faster easing of policy next year.
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