Pound Slides After “Dovish Hold” By Bank of England

One day after the Fed’s furiously hawkish pivot, which prompted many to ask why cut rates if Powell will just complain about the risk of rising inflation (thanks to his bizarro jumbo rate cut just three months ago which it is now clear was entirely meant to usher in president Kamala), moments ago the Bank of England kept interest rates unchanged at 4.75%, as expected, but with more policymakers voting for a cut than had been expected, one which sent the pound lower as this was seen as a dovish hold as three members wanted a cut, while the market expected an 8-1 split.

The Monetary Policy Committee voted by a majority of 6-3 to maintain #BankRate at 4.75%. Find out more: https://t.co/FWuXvEhN0R pic.twitter.com/9724Z6Edhd

— Bank of England (@bankofengland) December 19, 2024

The Monetary Policy Committee’s decision, which was in line with economists’ forecasts, came a day after the latest data showed that UK inflation rose to 2.6% last month from 2.3% in October.

The BoE cut rates by a quarter point at its previous meeting in November, but signalled at the time that another cut was unlikely until 2025. It has cut rates twice in 2024.

The majority of rate-setters said the recent increase in wage and price growth had “added to the risk of inflation persistence”. But three out of the nine MPC members, deputy governor Dave Ramsden, Alan Taylor and Swati Dhingra , voted for a quarter-point reduction because of sluggish demand and a weaker labor market. For the market, which was expecting just 1 dissenter, this was seen as a rather dovish twist.

The BOE said that a “gradual approach” on rate cuts remains right and they can’t commit to when or by how much rates will be cut in 2025. It said the labor market is coming back into balance. However, the bulk of the committee continued to worry that inflationary pressures were resolving only slowly and in fact headline inflation is expected to rise slightly. The overall guidance remained that policy needed to stay restrictive for sufficiently long to bring inflation back to target.

“The magnitude and direction of any such impacts would depend on a range of factors that were at present unknown, including the total package of economic policies to be delivered in the United States, their timing and any subsequent policy responses from other countries” the bank noted.

They said that risks around trade policy uncertainty have “increased materially” given the proposals from the incoming Trump administration on tariffs.

The minutes to the BOE December meeting showed that staff now expect zero growth in the final quarter of this year, weaker than forecast in November, reaffirming the dovish stance.

“Most indicators of UK near-term activity have declined,” the bank said on Friday.

It added that risks to global growth and inflation from geopolitical tensions and trade policy uncertainty had “increased materially” — an apparent reference to US President-elect Donald Trump’s plans to increase tariffs on imports to the US.

The BoE also continues to be skeptical about official wage data – on which markets placed huge emphasis earlier in the week. It said while earnings data did pick up in October, the official number “has tended to be more volatile than other wage indicators”. In fact, it said the information from its regional agents suggested 2025 settlements are likely to be in the 3-4% range (vs. ONS data at north of 5% in October).

In terms of forward guidance the MPC stuck to its previous message of gradual approach to easing. In terms of changes in assessment from the last meeting, the Committee noted that while inflation outcomes have been slightly higher than expected, it now judges that the labour market is “broadly in balance”. On the activity side, the MPC now expects 0% q/q GDP growth in Q4, below the November MPR projections

To re-iterate our call assumes that following a pause today, the Bank will cut again (-25bp) in February. Overall, we expect the Bank to cut with quarterly frequency in H1-25 before accelerating to cutting at every meeting in H2-25 brining Bank Rate to 3.25% by end-25.

The pound dipped to $1.259 after the BoE’s decision, though it was still up 0.2% on the day.

The yield on rate-sensitive two-year government bonds fell slightly to 4.46 per cent, flat on the day, with analysts citing the unexpectedly high number of dissents within the MPC.

Traders also have been reining in expectations of cuts next year. Immediately before Thursday’s MPC meeting, investors were betting on two quarter-point cuts next year. In October they had expected four.