Expected hold as interest rates remain at 4.75%
Interest rates have been maintained with a 6:3 vote in favour after it was cut to 4.75% in November.
At midday today, the Monetary Policy Committee (MPC) voted by a majority of 6:3 to hold the interest rate at 4.75%, a move widely anticipated.
Three of the members wanted to reduce the Bank Rate to 4.5%.
Rising inflation
The decision comes as inflation continues to increase, rising for the second consecutive month to 2.6% in November from 1.7% in September. This pushed it above the Bank of England’s (BoE) target of 2%, noting that it “was slightly higher than previous expectations”.
With this consecutive rise in inflation, it is not a surprise that the BoE has decided to keep the interest rate at 4.75%.
Six members who voted to keep the bank rate at 4.75% argued that “most indicators of UK near-term activity had weakened, but CPI inflation, wage growth and some indicators of inflation expectations had risen, adding to the risk of inflation persistence.”
Chancellor Rachel Reeves said: “I know families are still struggling with high costs. We want to put more money in the pockets of working people, but that is only possible if inflation is stable and I fully back the Bank of England to achieve that.
“Improving living standards across the country is our number one focus, and is why I chose to protect working people’s pay slips from tax rises, froze fuel duty and increased the national living wage for 3m people.”
A gradual approach
For five out of the six members who voted for a hold, “recent developments added to the argument for a gradual approach to the withdrawal of policy restrictiveness, while eschewing any commitment to changing policy at a specific meeting.
“For the other member, the evolution of and prospects for disaggregated measures of activity and inflation could warrant an activist strategy.”
Three of the members disagreed and preferred to reduce the Bank Rate to 4.5% as “the most recent data developments pointed 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.”
“In the short run, these factors, alongside higher uncertainty and weak global conditions, paired with the temporary uptick in headline inflation entailed a policy trade-off. In the medium term, a continued stance that was very restrictive risked deviating unsustainably from the 2% inflation target and opening an unduly large output gap.”
Yael Selfin, chief economist at KPMG UK, pointed out the MPC’s “cautious tone” and suggested that a change from this gradual approach is not likely.
“While the BoE is set to continue cutting interest rates early next year, the pace of easing is expected to be broadly unchanged. With underlying inflationary pressures set to remain elevated over the coming year, the MPC is unlikely to shift from its gradual approach. We expect interest rates to fall by around 75 basis points next year, down to 4%.”
Three of the members wanted to reduce the Bank Rate to 4.5%.
Rising inflation
The decision comes as inflation continues to increase, rising for the second consecutive month to 2.6% in November from 1.7% in September. This pushed it above the Bank of England’s (BoE) target of 2%, noting that it “was slightly higher than previous expectations”.
With this consecutive rise in inflation, it is not a surprise that the BoE has decided to keep the interest rate at 4.75%.
Six members who voted to keep the bank rate at 4.75% argued that “most indicators of UK near-term activity had weakened, but CPI inflation, wage growth and some indicators of inflation expectations had risen, adding to the risk of inflation persistence.”
Chancellor Rachel Reeves said: “I know families are still struggling with high costs. We want to put more money in the pockets of working people, but that is only possible if inflation is stable and I fully back the Bank of England to achieve that.
“Improving living standards across the country is our number one focus, and is why I chose to protect working people’s pay slips from tax rises, froze fuel duty and increased the national living wage for 3m people.”
A gradual approach
For five out of the six members who voted for a hold, “recent developments added to the argument for a gradual approach to the withdrawal of policy restrictiveness, while eschewing any commitment to changing policy at a specific meeting.
“For the other member, the evolution of and prospects for disaggregated measures of activity and inflation could warrant an activist strategy.”
Three of the members disagreed and preferred to reduce the Bank Rate to 4.5% as “the most recent data developments pointed 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.”
“In the short run, these factors, alongside higher uncertainty and weak global conditions, paired with the temporary uptick in headline inflation entailed a policy trade-off. In the medium term, a continued stance that was very restrictive risked deviating unsustainably from the 2% inflation target and opening an unduly large output gap.”
Yael Selfin, chief economist at KPMG UK, pointed out the MPC’s “cautious tone” and suggested that a change from this gradual approach is not likely.
“While the BoE is set to continue cutting interest rates early next year, the pace of easing is expected to be broadly unchanged. With underlying inflationary pressures set to remain elevated over the coming year, the MPC is unlikely to shift from its gradual approach. We expect interest rates to fall by around 75 basis points next year, down to 4%.”