The Bank of England closed its final session of the year with a decision to leave interest rates unchanged, after U.K. The decision was widely expected and came in the wake of inflation reaching an eight-month high.
The bank has already taken its key rate from 5.25% to 4.75% this year in two quarter-percentage-point moves. Today’s decision was not unanimous as expected, with three members of the Monetary Policy Committee voting to reduce rates, while six were in favour of a freeze.
the MPC said growth was faltering while inflation risks remained and highlighted the Chancellor’s £40bn tax-raising budget, along with uncertainty over trade policy after Donald Trump’s November election victory.
Peter Stimson, Head of Product at MPowered Mortgages, described it as a decision that was “never in doubt, but the manner in which it was reached has raised some eyebrows – and hopes – for 2025”.
Amy Knight: frustrating for retail
He added: “The fact that a third of the Monetary Policy Committee voted for an immediate rate cut suggests that several of the Bank’s decision-makers are more concerned by underlying economic issues than the jump in consumer inflation revealed yesterday.
“The surprise surge in wage inflation, rather than the jump in CPI to 2.6% – which had been widely expected – had caused some consternation on the swaps market, which determines mortgage interest rates more directly than the Bank’s base rate decisions.
“But the minutes published alongside today’s decision should provide some rays of hope that the next Base Rate cut may be nearer than the markets are currently forecasting. Rather than just making the three base rate cuts currently priced into the swap curves, if economic conditions prevail the Bank may be prepared to cut faster and deeper in 2025.
“Despite the current backdrop of rising swap rates, we can expect to see some frenzied competition between mortgage lenders in January. The first weeks of the year are traditionally an important time for lenders, with many slicing into their margins to offer lower interest rates in a bid to win new customers.
“While the Base Rate has only been cut twice in 2024, the prospect of three or more reductions in 2025 will embolden lenders to price very competitively at the start of the year as they battle for market share.”
Despite the fact that it had been widely predicted, it “did little to calm the jittery sentiment on the markets
Susannah Streeter head of money and markets, Hargreaves Lansdown could see a “chill spreading” , with interest rate cuts on ice, and cold water being thrown on hopes for a rapid reduction in rates next year.
She added: “Despite the fact that it had been widely predicted, it “did little to calm the jittery sentiment on the markets,” she said. “The FTSE 100 stayed deep in the red, while the pound started to slide again against the dollar, trading at $1.26.
“The door is still open to cuts however, as this was not a unanimous decision, with three members of the committee voting for another 0.25% rate cut. However, they are expected to be fewer and far between next year, with the markets pricing in just two interest rate cuts.
Managing cash flow and coping with operational cost pressures such as rising wages, will remain top priorities in the first part of 2025 until cheaper borrowing makes it easier
The Bank of England is ringing in the same discordant notes of caution as the Federal Reserve. The Fed’s guidance yesterday of just two further interest rate cuts next year sparked nervousness and a wave of sell-offs, and the Bank’s decision has done little to provide much cheer. We are seeing tighter scrooge like policy returning from central banks, who remain cautious about inflationary risks ahead – fresh tariffs from Trump are looming and in the UK the effects of the Budget changes on prices still hard to calculate.
“Nevertheless, with the UK economy contracting, and inflation still more likely than not to head back down towards target next year, we’re still on the rate-cutting track but the inclement economic weather means we are on go-slow. This could be good news for savers and those looking for an annuity, but bad news for mortgage borrowers.”
Amy Knight, small business commentator at NerdWallet UK said: “The Bank of England’s continued ‘wait and see’ approach is frustrating for retail, leisure, and hospitality businesses bracing for a sharp rise in employers NICs from April.
“Managing cash flow and coping with operational cost pressures such as rising wages, will remain top priorities in the first part of 2025 until cheaper borrowing makes it easier for pubs, cafes, and shops, which are heavily reliant on staff, to find additional funds.
Neil Rudge: business may be united
“While disappointing, a pause in the rate-cutting proceedings is not surprising given the persistent inflation challenges facing the UK economy. Inflation, particularly in the services sector, remains a blocker to meaningful rate reductions in the short term.
“On the upside, consumer confidence improved slightly compared to November, and some households are feeling better about their finances.
“With wages rising, customers may feel comfortable splashing out on ‘nice to haves’ such as meals out and leisure activities. Consumers seeking small luxuries while living on a tighter budget could provide a much-needed sales boost for businesses in these sectors. However, discretionary spending could take a hit next year if higher costs force firms to cut jobs.”
Neil Rudge, Chief Banking Officer, Commercial, at Shawbrook said: “This decision may frustrate business leaders who are seeking positive signals after the challenges posed by October’s Budget and last month’s contraction in the economy.
“Borrowing costs remain tight due to previous hikes still affecting existing loans and economic recovery is projected to be slower than before, but there is some optimism of rate cuts next year and that SMEs could benefit from reduced borrowing costs, giving them the opportunity to accelerate their growth plans. Despite the hurdles, business leaders have consistently shown remarkable resilience and adaptability. They will continue to find practical solutions to the challenges they face.”
And Mike Randall, CEO at Simply Asset Finance, says: “Holding the base rate may not have been the outcome many businesses had anticipated. However, it does offer a degree of stability, giving businesses the clarity to revisit strategic investment plans while planning ahead for upcoming challenges like rising National Insurance rates and increases in the living wage.”
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