December 2024 BoE Review: Steady As She Goes

As expected, the Bank of England’s Monetary Policy Committee stood pat on policy at the final meeting of the year, maintaining Bank Rate at 4.75%, in line with the outcome that money markets had fully discounted in advance of the announcement.

The lack of policy shifts means that the ‘Old Lady’ has delivered just 50bp of easing in total this year, a considerably more gradual pace of removing policy restriction than that of the Bank’s G10 peers, and some way off the over 150bp of cuts that the GBP OIS curve had discounted at the beginning of the year.

In any case, December’s decision was not a unanimous one. Once again, external MPC member Dhingra dissented in favour of an immediate 25bp cut, cementing her place as the Committee’s resident ‘uber-dove’. 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.

Accompanying the decision, as always, was the MPC’s updated policy statement. Largely, this statement was a repeat of that issued after the November meeting. As such, the Committee reiterated that a “gradual” approach to removing policy restriction remains appropriate, and that policy must remain “restrictive for sufficiently long” in order to reduce the risks of inflationary pressures becoming embedded within the economy. Furthermore, the MPC repeated that a ‘data-dependent’ and ‘meeting-by-meeting’ approach will continue to be followed, with particular focus on the “risks of inflation persistence”.

In reaction, the GBP OIS curve repriced marginally in a more dovish direction, as a result of the tighter than expected vote split. As such, money markets now see around a 72% chance of a cut in February, up from around 55% at Wednesday’s close. Furthermore, 22bp of easing is now priced by the end of Q1, from 18bp yesterday, while two 25bp cuts in 2025 are now fully priced back into the curve.

These policy expectations, and the Bank’s continued reluctance to deliver a more rapid pace of normalisation, are reinforced by this week’s economic data.

While unemployment held steady at 4.3% in the three months to October, both regular pay, and earnings including bonuses, rose by 5.2% YoY over the same period, boosted by the summer’s above-inflation public sector pay awards, which will further boost earnings growth in the November figures. Setting that aside, broader pay pressures remain intense, with earnings growth running at a rate roughly double that which would be compatible with a sustainable return towards the 2% inflation aim.

Meanwhile, price pressures remain persistent. Headline CPI rose 2.6% YoY in November, 0.2pp above the Bank’s most recent forecast, while core prices rose 3.5% YoY, and services CPI rose by 5.0% YoY, having now been north of that level for the last two and a half years. Progress in eradicating these persistent underlying price pressures has been glacial of late, with some of this progress seemingly starting to be undone. In order to unlock another rate cut, policymakers will be seeking convincing evidence of faster disinflation during the winter months.

Looking ahead, providing said evidence does indeed present itself, my base case is for the MPC to deliver the next 25bp Bank Rate cut at the February meeting. 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.