(Updated 14:50, 19/12/2024) The Bank of England (BoE) left interest rates unchanged on Thursday as it announced its final policy decision of 2024.
However, three of the nine policymakers at the bank voted to cut interest rates, with this dovish split and warnings of stagflation weighing on the the British pound (GBP).
At the time of writing, GBP/USD is sliding back towards the three-week low hit in the wake of the Federal Reserve decision on Wednesday night. GBP/EUR has retreated sharply from its 33-month high.
What did the Bank of England do?
The BoE held interest rates at 4.75% today, amid recent signs that UK inflation remains sticky.
Data this week has pointed to persistent price pressures, with wage growth accelerating in the three months to October and headline inflation jumping from 2.3% to 2.6% in November – its highest level since March.
CPI rose by 2.6% in the 12 months to Nov 2024, up from 2.3% in Oct 2024.
Read the release ➡️ https://t.co/c7fPzGpIRc pic.twitter.com/xymm6zzBFR
— Office for National Statistics (ONS) (@ONS) December 18, 2024
However, markets were surprised that three members of the bank’s Monetary Policy Committee (MPC) voted to cut. BoE Deputy Governor Sir Dave Ramsden and external committee members Alan Taylor and Swati Dhingra all wanted to lower Bank Rate by 25bps to 4.5%.
The British central bank also expressed concern about stagflation risks, downgrading its growth forecast and warning of higher inflation. The possibility of trade wars under a Donald Trump presidency, global geopolitical tensions, and Chancellor Rachel Reeves’s tax-hiking budget all threaten to push prices higher and weigh on the UK economy.
How has this impacted the pound?
The pound slid against the majority of its peers in the wake of the BoE decision, due to two key factors.
Firstly, the dovish split among the MPC indicates that there could be a larger appetite for interest rate cuts than markets anticipated.
Higher interest rates make the domestic currency more attractive to investors, as they receive a higher return. Therefore, the likelihood of UK interest rates falling at a slightly faster pace next year dampened the pound’s appeal.
Secondly, there are concerns that persistent inflation and restrictive interest rates could hammer the UK’s already-fragile economy. British GDP contracted in September and October, and recent company insolvencies and ballooning government borrowing costs are unnerving investors. With the bank downgrading its growth forecasts and warning of stagflation risks, Thursday’s decision reinforced these fears.
Sterling was spared steeper losses thanks to the fact that the BoE left its guidance broadly unchanged. The bank still expects to cut rates gradually next year, despite economic concerns. And while three policymakers favoured a cut on Thursday, the majority may keep the doves in check.
What’s next for the pound?
GBP exchange rates could recover some lost ground on Friday, if the UK’s latest retail sales figures report a recovery in sales growth in November. However, the upside may be limited as analysts could attribute the acceleration in retail activity to the festive period.
Investors will be keeping a close eye on indicators of economic health in the UK as we enter next year. If stagflation fears materialise further, with high inflation and anaemic growth, the pound could weaken in 2025.
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