Deep splits among Bank of England policy makers dash hopes of faster interest rate cuts
Hopes of faster interest rate cuts faded yesterday after the Bank of England’s latest decision laid bare deep divisions among policymakers.
The Bank’s Monetary Policy Committee (MPC) voted by a narrow 5-4 majority for a cut from 4 per cent to 3.75 per cent.
That was after Governor Andrew Bailey swung behind ‘doves’ calling for rate reductions, having sided with the ‘hawks’ to keep rates on hold last month.
The MPC is split down the middle between the two sides. Hawks, including chief economist Huw Pill and deputy governor Clare Lombardelli, are worried because inflation at 3.2 per cent remains well above the Bank’s 2 per cent target.
But doves such as Sarah Breeden and Dave Ramsden, two other deputies, think inflation risks are receding.
Even this group is split, with two of the other MPC members, Swati Dhingra and Alan Taylor, increasingly worried that weaker consumer demand and rising unemployment are already weakening inflation pressures.
Split decision: The Bank of England’s Monetary Policy Committee voted by a narrow 5-4 majority to cut interest rates from 4%to 3.75%
Yesterday’s rate cut was widely expected and came a day after official figures showed a much steeper-than-expected fall in inflation to 3.2 per cent in November, an eight-month low.
That had led some to hope the Bank would signal a steeper pace of cuts for next year.
The MPC yesterday said it expected inflation to fall towards 2 per cent much more quickly than previously expected – by April rather than early in 2027.
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It also slashed its growth outlook for the end of this year, while Bailey signalled that it would remain ‘vigilant’ about the prospect of surging unemployment.
Yet the Governor still put a hawkish spin on the cut. Six cuts since the summer of 2024 have brought rates down from 5.25 per cent to 3.75 per cent and Bailey said they remain on a ‘gradual path downward’.
He cautioned: ‘But with every cut we make, how much further we go becomes a closer call.’
The hawkish language meant that the pound initially spiked by a cent versus the dollar before settling little changed at just under $1.34.
Government borrowing costs also climbed, with yields on ten-year gilts shooting above 4.5 per cent before receding.
Market expectations for interest rates next year were little changed, with traders betting that there will be one to two quarter-percentage point cuts.
Andrew Wishart, senior UK economist at Berenberg, said: ‘Although the Bank of England reduced its policy rate from 4 per cent to 3.75 per cent as investors anticipated, the recent deterioration in the economic data did not alter its overarching narrative.
‘Only Governor Andrew Bailey switched his vote from a hold to a cut, turning the minority of four for a cut then into a majority of five today.
‘The MPC continued to guide that the cadence of bank rate reductions will slow.’
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