BoE takes a pause, while a “dovish” split indicates cuts ahead

The BoE decided to mai ntain the status quo this month. The MPC split was more dovish, 6 to 3, than initially expected (8 to 1). Deputy Governor Dave Ramsden and external members Swati Dhingra and Alan Taylor voted to reduce interest rates by 25bps. While the “dovish” split suggests cuts to come in 2025, Governor Bailey stressed that the policymakers “can’t commit to when or by how much” they will reduce rates in 2025. Also, the Governor reiterated that “a gradual approach to future interest rate cuts remains right”. Five of the six policymakers who voted in favor of an unchanged policy today saw a stronger case for a gradual approach and preferred to avoid commitments on timing of the rate cuts, thus indicating a meeting-by-meeting approach. The three dissenting policymakers saw a risk of an unduly large output gap and CPI inflation well below 2% target in the medium term, implying that "a less restrictive policy rate was warranted ”. The BoE stressed that regular wage growth in the private sector, the BoE’s key metric, has increased “quite sharply” but noted that this metric tends to be also volatile. Overall, the MPC assesses the labour market “broadly in balance”. Yet, the regular Agents’ Survey suggest businesses expect average pay rises of 3-4% in 2025 (versus 2-4% reported before the Budget) and many businesses will likely consider headcount reductions after the increase in the National Insurance Contributions. Finally, trade insecurity has “increased materially”, but the magnitude and direction of impact on the UK economy might be unclear over some period of time. The MPC acknowledged continued progress in disinflation (thanks to abating previous external shocks) but stressed that “remaining domestic inflationary pressures” have been resolving more gradually. Some household inflation expectations have picked up and yesterday’s figures showed that consumer price inflation edged higher to 2.6% in November, slightly more than the BoE had projected in November. Overall, the decision echoed the appropriateness of a “gradual approach to future interest rate cuts” despite a more “dovish” than expected split in the MPC. We keep our scenario unchanged, expecting four rate cuts in 2025, at every meeting with an updated forecasts scenario, hence February, May, August and November. While the effect of higher government spending should more than offset the negative impact from tax hikes on GDP growth next year, reduced private consumption and investment from 2026 onwards will necessitate looser monetary policy. So next year cuts will be frontloaded to anticipate and to limit the negative impact on private sector.