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The Bank of England (BoE) has opted to leave interest rates unchanged at 4.75% in its final decision of the year, as inflation continues to rise.
The Monetary Policy Committee (MPC) which sets interest rates was split 6-3 over its decision. Three policymakers wanted to cut rates to 4.5%, but were outvoted by the other six on the committee.
Andrew Bailey, the governor of the BoE, said: "We’ve held interest rates today following two cuts since the summer.
"We need to make sure we meet the 2% inflation target on a sustained basis. 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."
Explaining its decision to leave interest rates unchanged, the MPC pointed to rising inflation: "Since the MPC’s previous meeting, twelve-month CPI inflation has increased to 2.6% in November from 1.7% in September.
"This was slightly higher than previous expectations, owing in large part to stronger inflation in core goods and food. Services consumer price inflation has remained elevated. Headline CPI inflation is expected to continue to rise slightly in the near term. Although household inflation expectations have largely normalised, some indicators have increased recently."
Traders are now betting that the BoE will lower interest rates just twice next year, taking the base rate from 4.75% to 4.25% by the end of 2025.
After rate cuts in August and November, market expectations remain divided on whether the BoE will reduce rates further in its February meeting. Investors are now pricing in a 70% chance of a rate cut in February, with only two cuts expected throughout 2025.
This stands in stark contrast to projections for the US Federal Reserve and the European Central Bank, both of which are expected to take more aggressive action.
Analysts at investment bank Goldman Sachs (GS) believe that the BoE may reduce rates quarterly, “given firmer near-term inflation numbers and uncertainty around the impact of the employer national insurance hike.” Nomura analysts predict that rates will ultimately settle at around 3%-3.5% in the long term.
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"We think it's too early for the BoE to pre-commit to a sustained cutting cycle or to conclude that risks to inflation returning sustainably to the 2% target in the medium term have dissipated," Bank of America analysts said in a note to clients.