The Bank of England’s final monetary policy meeting of 2024 concluded with a decision to hold interest rates steady at 4.75%, despite mounting pressures from a resurgent inflation rate and faltering economic growth. This decision, while anticipated by most analysts, revealed significant divisions within the Monetary Policy Committee (MPC) that could shape the central bank’s trajectory in the months ahead.
Headline inflation rose to 2.6% in November, its highest level since March, exceeding earlier BoE projections and reigniting concerns over entrenched price pressures. Services inflation remains particularly resilient, driven by robust wage growth and persistent supply chain challenges. The BoE acknowledged these inflationary dynamics in its statement, noting that the latest figures have complicated the outlook for future rate decisions. Meanwhile, the central bank also downgraded its growth forecast for the fourth quarter, projecting stagnation rather than the modest 0.3% expansion it had predicted in November. This revision comes on the heels of a surprise 0.1% economic contraction in October, underscoring the precarious state of the U.K.’s recovery.
The decision to hold rates was not unanimous. Three members of the nine-member MPC voted for an immediate rate cut, highlighting growing concerns about the fragility of the U.K. economy. This dissent marks a significant departure from expectations, as most economists had anticipated a near-unanimous decision to maintain the current rate. The split reflects broader uncertainties over the interplay between inflation and growth, with policymakers struggling to reconcile the two in a way that ensures long-term economic stability.
Markets responded swiftly to the announcement, with sterling’s gains against the U.S. dollar moderating after the decision. By midday, the pound was up 0.25%, buoyed slightly by earlier momentum. The currency’s performance has been shaped in part by the U.S. Federal Reserve’s recent quarter-point rate cut, which fueled a dollar rally earlier in the week. However, the Fed’s hawkish outlook for 2025 has tempered expectations for sustained dollar strength, providing some relief for sterling in the short term.
Bond markets mirrored the uncertainty surrounding the BoE’s decision. Yields on 10-year U.K. government bonds rose by four basis points to 4.596%, maintaining the country’s risk premium over Germany at its widest level in decades. German bund yields also climbed, with the 10-year benchmark rising by five basis points. These developments reflect broader shifts in European monetary policy, with the European Central Bank’s recent rate cut signaling continued easing in the region. For the BoE, this divergence in policy approaches adds another layer of complexity to its decision-making process.
Economic commentators have offered varied perspectives on the implications of the BoE’s rate hold. Suren Thiru, economics director at the Institute of Chartered Accountants in England and Wales, argued that the dovish undertones in the meeting minutes leave the door open for a potential rate cut in early 2025. However, he warned that persistent inflation and the risk of stagflation could limit the BoE’s flexibility. Similarly, Matthew Ryan, head of market strategy at Ebury, described the MPC as increasingly polarized. Dovish members have prioritized concerns over weak growth, while hawks remain focused on the risks posed by elevated inflation and a tight labor market.
The BoE’s latest decision underscores the high-stakes nature of its policy deliberations. With inflation still above target and growth faltering, the central bank faces unprecedented challenges in charting a course that balances competing priorities. As markets and policymakers await the next steps, the BoE’s actions will continue to shape the economic narrative for the United Kingdom.
