The Bank of England (BOE) kept its main interest rate at 4.75% in December, but surprised markets with a dovish 6-3 vote split that sent the pound tumbling.
In a significant shift, three members of the Monetary Policy Committee (including Deputy Governor Ramsden) voted for an immediate quarter-point cut, five believed recent developments supported a gradual approach to easing, and one member – thought to be Catherine Mann – appears poised to favor aggressive easing in due course.
Link to official BOE Statement (December 2024)
Turned out, the U.K. economy was giving mixed signals. Inflation jumped up to 2.6% in November from 1.7% in September, which wasn’t great news. Service prices are still running hot at 5%, and wage growth recently spiked to 5.4%. The BOE thinks inflation might tick up a bit more in the near term, and they’re seeing some worrying signs that people are starting to expect higher prices again.
On the other hand, the economy is also really starting to slow down. The BOE now expects zero GDP growth in Q4 2024, down from its previous 0.3% forecast. That’s about the same growth rate as my hairline!
Indicators of near-term activity have declined, while business sentiment has worsened further. The labor market is now judged to be “broadly in balance,” though private sector wage growth picked up to 5.4% in the latest data.
Link to official BOE Meeting Minutes (December 2024)
BOE Governor Andrew Bailey tried to walk a fine line in his presser, saying “a gradual approach to future interest-rate cuts remains right,” and that policy needs to stay restrictive until high inflation risks a̶r̶e̶ a̶s̶ d̶e̶a̶d̶ a̶s̶ t̶h̶e̶ W̶i̶c̶k̶e̶d̶ W̶i̶t̶c̶h̶ o̶f̶ t̶h̶e̶ W̶e̶s̶t̶ have “dissipated further.”
Unfortunately for GBP buyers, traders interpreted the three votes for rate cuts and deteriorating growth outlook as evidence the BOE is moving closer to beginning an easing cycle, despite ongoing inflation concerns.
Market Reactions
British Pound vs. Major Currencies: 5-min
Overlay of GBP vs. Major Currencies Chart by TradingView
The British pound, which was already trading lower hours ahead of the release, swung even lower at the BOE’s more dovish-than-expected split decision.
Sterling maintained its downtrends until the end of the European session when the currency took a chill pill from its losses and ranged near its intraday lows.
The pound closed lower against its major counterparts except against the relatively weaker Japanese yen.
