As expected, the Bank of England’s Monetary Policy Committee stood pat on policy at the final meeting of the year, holding Bank Rate steady at 4.75%.
Such a decision, which had been fully discounted by money markets in advance, means that the ‘Old Lady’ has delivered just 50bp of easing this year, as policymakers continue to gradually remove policy restriction, amid continued signs of price pressures remaining more intense, and more stubborn, than had been expected.
The MPC’s vote, however, was not a unanimous one, with external member Dhingra cementing her place as the MPC’s ‘uber-dove’, preferring instead a 25bp cut at the December meeting.
Dhingra was, surprisingly, joined in dissent by Deputy Governor Ramsden, and external member Taylor, resulting in a tighter than expected 6-3 vote in favour of a 25bp cut.
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Accompanying the decision, was the MPC’s latest policy statement. The forward guidance within this statement was, by and large, a repeat of that issued last time around, with policymakers hence reiterating that a “gradual” approach to removing policy restriction remains appropriate, that policy must remain “restrictive for sufficiently long” in order to reduce the risks of inflationary pressures becoming embedded within the economy, and that a ‘meeting-by-meeting’ approach will continue to be followed going forwards.
Looking ahead, my base case my base case is for the MPC to deliver the next 25bp Bank Rate cut at the February meeting, providing that further disinflationary progress is made over the winter. Beyond this, policymakers are likely to deliver further such cuts on a quarterly basis, likely at meetings which coincide with the release of an updated Monetary Policy Report.
Risks to this base case, though, are tilted towards a more dovish outcome, amid increasing signs of overall economic momentum stalling, and with risks to the labour market tilted to the downside, amid the upcoming changes to National Insurance. Were a greater degree of labour market slack to dramatically reduce overall demand, thus leading to an easing in stubborn services inflation, this could lead to a faster pace of normalisation from the BoE, though firm hints in this direction are unlikely until the second quarter, at the earliest.
The MPC will likely be reluctant to pivot away from the current ‘slow and steady’ stance too soon, particularly as the UK economic backdrop becomes an increasingly stagflationary one, lending further support to the case for ‘gradual’ rate cuts for the time being.