Interest rates could remain at their current rate for the foreseeable future says the Bank of England, with ongoing inflation being the main driver.
Earlier today, the Monetary Policy Committee maintained its benchmark rate at 4.75% with a six-to-three decision. The majority expressed concern that recent price and wage increases “added to the risk of inflation persistence”.
The BoE also predicted zero growth for the final three months of 2024 – a change from its previous forecast of 0.3% - adding to the growing economic issues facing the Labour government.
The central bank noted “significant uncertainty around how the economy might respond to higher overall costs of employment” in response to the recent Budget announcement regarding national living wage and employers’ tax increases.
Andrew Bailey, BoE governor, said: “We think a gradual approach to future interest rate cuts remains right. But with the heightened uncertainty in the economy, we can’t commit to when or by how much we will cut rates in the coming year.”
Speaking later to reporters, Mr Bailey said he thought the path for interest rates was "downwards", adding: "The world is too uncertain."
"We will come back in February at our next meeting and review it again."
It is anticipated that the BoE will make two quarter-point rate cuts in 2025, the same as immediately before Thursday’s decision. This would be fewer than the four the market expected to occur as recently as October.
Rob Wood, UK economist at Pantheon Macroeconomics, said the minutes of the MPC meeting were “cautious and therefore more hawkish than that six-to-three headline would suggest”.
He said inflation was likely to rise above 3 per cent in the spring, “with highly visible price rises that could destabilise inflation expectations that are already above average and rising”.
A majority of the MPC said that “recent developments added to the argument” for gradual rather than rapid rate cuts, warning of “the potential trade-off between more persistent inflationary pressures and greater weakness in output and employment.”
The BoE added that geopolitical tensions and uncertainty surrounding trade policy had “increased materially”, which could be a reference to US president-elect Donald Trump’s plans to increase tariffs on imports to the US.
Rachel Reeves commented: “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 3 million people.”
Ian Stewart, the chief UK economist at Deloitte, said: “Sluggish growth and a softening in the labour market are likely to restart the easing cycle in the new year, with February being the most likely timing for the next rate cut. By the end of 2025, we expect to see UK interest rates at around the 4.0% mark.”