Rising inflation in the wake of October’s Budget and a recent economic downturn has left uncertainty around interest rate cuts ahead.
Following the Bank of England's decision to hold interest at 4.75%, governor Andrew Bailey signalled policymakers could not commit to reductions ahead.
“We need to make sure we meet the 2% inflation target on a sustained basis,” he said. "
Rising inflation in the wake of October’s Budget and a recent economic downturn has left uncertainty around interest rate cuts ahead.
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.”
A separate survey by the Bank of England showed business sentiment had been hit as firms braced for higher labour costs on the Budget’s hike to employer national insurance.
Early reactions to the Budget had flagged a greater risk of upward pressure to consumer prices because of this, it added.
Monetary Policy Committee members were split over Thursday’s rate call, with six voting to maintain interest, but three backing a cut after the UK economy contracted in October.
Berenberg analysts pointed to the “risky” nature over the prospect of a dovish tone being taken by the bank ahead though.
“Any positive impulse to demand would allow firms to pass on more of the large increase in labour costs they face to customers by raising prices, keeping inflation higher for longer,” analysts noted.
Demand trends and promised government spending appeared on course to push quarterly growth rates higher into next year, Berenberg added.
Uncertainty over Bank of England’s move
Uncertainty dominated the Bank of England’s latest Monetary Policy Committee (MPC) meeting as it opted to hold its key lending rate at 4.75% on Thursday.
Both higher-than-expected inflation recently and weaker economic growth were cited in the update, which pointed to a continued “gradual approach” in cutting interest ahead.
Though six members of the committee had backed holding the rate, analysts pointed to the other three that favoured another immediate cut.
This “slightly surprised markets,” ING Economics said, leaving expectations swaying towards a cut in February’s meeting.
“The apparent growing dovish front within the MPC in spite of the latest hawkish wage data potentially suggests a greater focus on slowing activity,” ING added.
Deutsche Bank highlighted expectations for a cut in February, before three-quarter point reductions in the second half of next year.
“Today’s decision was anything but a dull affair,” Deutsche chief UK economist Sanjay Raja said.
“Put simply, the MPC is neither committing to a particular quantum of rate cuts, or delivering said cuts within a specific time frame.”