In December, the Bank of England decided to hold its primary interest rate steady at 4.75%, catching many off guard with a dovish 6-3 vote that led to a drop in the pound’s value.
The Monetary Policy Committee is showing signs of a shift. Three members, including Deputy Governor Ramsden, pushed for a quick quarter-point rate cut. Five members leaned towards a more cautious easing, while one member, likely Catherine Mann, seems ready for a bolder move in the future.
The latest figures reveal a UK economy sending out mixed messages. Inflation made a jump from 1.7% in September to 2.6% in November, which is less than ideal. Service sector prices are holding strong at 5%, with wage growth climbing to 5.4%. The Bank of England is forecasting a slight rise in inflation soon and is concerned about growing expectations of future price hikes.
Meanwhile, the economy’s pace is slowing noticeably. The BOE’s prediction for GDP growth in the last quarter of 2024 has been cut to zero, a far cry from the previously expected 0.3%. It’s akin to the slow and steady decline of a receding hairline!
Short-term activity indicators are dwindling, and business confidence is dropping even further. The labor market is described as "broadly in balance," although private sector wages have picked up momentum, reflecting the recent 5.4% growth.
During a press conference, BOE Governor Andrew Bailey carefully balanced his words, noting that "gradual future interest-rate cuts are still appropriate." He emphasized the need for policies to remain tight until the threat of inflation has "dissipated further," in a manner of speaking.
Yet, for those betting on the pound, it was a less than satisfying outcome. Traders took the trio of rate cut votes and the dismal growth expectations as signals that the BOE might be inching towards a period of easing despite ongoing worries about inflation.
Market Reactions
The British pound’s performance against major currencies is telling.
The pound, which had been on a downward trend even before the announcement, continued to slide following the BOE’s more dovish-than-expected decision.
Throughout the European session, sterling’s decline was controlled, stabilizing at near day-low levels by the session’s end.
Ultimately, the pound saw a lower close against most major currencies, except for a slightly weaker Japanese yen.
