The Bank of England has struck a hawkish surprise. Market participants had braced for no more than a couple of dissenters in favour of no change, and it's safe to say that the razor-thin 5-4 vote has turned a few heads.
As many as four of the committee opted for no change (Greene, Lombardelli, Mann and Pill), Taylor voted for a 50bp cut, while the remaining four favoured a 25bp move. This triggered an unprecedented second round of voting, during which Taylor shifted his vote to a 25bp cut.
The bank’s communications also hint at little rush to lower interest rates again. Further cuts will continue to be both “gradual and careful”, with policymakers appearing far more concerned about elevated consumer prices than they are about the state of economic activity or the labour market. Forecasts for inflation were upped and, interestingly, so was the bank’s growth projection for 2025.
Sterling has posted modest gains, as investors slash bets in favour of additional cuts, with a November rate reduction now less than 50% priced in by swap markets.
This presents a double-edged sword, as while the prospect of higher rates for longer should buoy the pound, the limited appetite for policy easing risks inflicting further damage on Britain’s already fragile economy.
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