Bank of England keeps ‘gradual’ cut prospects alive as interest rate held

The Bank of England has maintained its guidance for “gradual” interest rate cuts next year, following surprise support for a reduction this month.

Its rate-setting committee, while deciding to keep Bank rate on hold at 4.75%, noted higher than expected wage rises and inflation despite a slowdown in the economy.

However, three members backed a cut, meaning the vote came in at 6-3 in favour of no change.

Just one dissenting voice had been expected.

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Governor Andrew Bailey 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.”

Earlier this month, Mr Bailey voiced concerns about how businesses would react to budget measures, such as the hike to employer national insurance contributions from April.

Lobby groups and many individual firms have warned the additional costs will be passed on – risking further inflationary pressure.

Mr Bailey also noted a worry that tit-for-tat trade tariffs, if first confirmed by incoming US president-elect Donald Trump, would add to the acceleration in price growth.

The Bank said it was still evaluating the effects of the budget on the outlook.

It has also consistently spoken of the threat to rate cuts from salaries.

The Bank does not like wages going up too fast – currently at twice the rate of price growth – because it can fuel demand in the economy and make inflation worse.

Economists had been widely expecting four rate cuts in 2025 on the back of the two reductions this year as inflation fell back towards the Bank’s 2% target following the West’s energy-led price shock.

But financial markets, which had been expecting a similar future path up until a few weeks ago, now see only two quarter point reductions priced in due to additional weight on inflation.

However, the chances of a rate reduction at the Bank’s next meeting in February rose from near 50% to 66%, according to LSEG data after the minutes of the 18 December meeting were published.

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