The Bank of England rate decision is the focal point for UK markets on Thursday, with the Monetary Policy Committee (MPC) widely expected to hold interest rates unchanged at 3.75 per cent when it announces its verdict at noon. Investors will be parsing every word from governor Andrew Bailey for any hint that a rate rise is coming sooner than markets currently expect.
Futures tracked by IG point to a higher open for the FTSE 100, though sentiment remains cautious. Fears about energy prices, government debt and artificial intelligence are all weighing on investors simultaneously, making the MPC’s tone as consequential as its formal decision.
Bailey’s Warning on Energy and Inflation
Bailey set the mood last week when he told MPs that inflation risks are ‘to the upside’, singling out energy costs as a particular concern. He warned that prices ‘could be higher still’ as a lasting resolution to the Iran conflict and the blockage of the Strait of Hormuz continues to elude negotiators.
‘The conflict is still going on and it is also causing a high level of energy prices and quite a bit of volatility in energy prices,’ Bailey said, adding that the turbulence was ‘feeding through into financial markets’.
Economists have speculated that the Bank of England is likely to raise rates once before Christmas and as many as three further times before July next year, a path that would leave interest rates one percentage point higher than current levels within twelve months.
Bank of England Rate Decision: What December’s Split Vote Revealed
The December MPC meeting offered a window into how divided the committee has become. At its meeting ending on 18 December 2024, the MPC voted by a majority of six to three to maintain Bank Rate at 4.75 per cent, according to the Bank of England’s published minutes. Three members had preferred to reduce Bank Rate by 0.25 percentage points, to 4.5 per cent, a more dovish position than the majority was prepared to accept.
That split is consequential. A committee divided three ways on the appropriate direction of travel is one that will scrutinise each successive inflation reading carefully before committing to a change. The dissenting voices in favour of a cut also suggest the peak in rates may not be as distant as the hawkish tone of recent public statements implies.
Bailey himself has offered a forward-looking steer. According to CNBC, the governor signalled that the UK could be on track for four interest rate cuts over the next year, should inflation continue on a downward path. That conditional signal sits in deliberate tension with the upside inflation warnings he delivered to MPs, and it is precisely the kind of ambiguity investors will be trying to resolve when the noon statement lands.
Federal Reserve Moves First
Across the Atlantic, the Federal Reserve moved first, announcing on Wednesday a rise of 25 basis points despite reported pressure from the White House to hold. The decision adds to the backdrop of tightening monetary conditions globally and gives the MPC additional political cover to stay on a firmer footing if its own inflation data warrants it.
The Fed’s move also complicates the sterling picture. A more hawkish Federal Reserve tends to support the dollar, which in turn affects UK import costs and, ultimately, domestic inflation. Bailey is unlikely to address the Fed’s decision directly, but the linkage between the two central banks’ paths will be uppermost in traders’ minds.
Other stories making the rounds this morning include Marks and Spencer shares sliding ahead of an expected inflation hit to consumer spending, a High Court dispute between Santander and BMW over motor finance, and the home secretary’s donor being reprimanded by the accountancy regulator.
The Bank of England’s noon announcement will set the tone for UK equities through the afternoon. The six-to-three vote recorded in December shows the MPC is far from uniform in its thinking, and any shift in that balance when today’s minutes are published will be read as a steer on the trajectory of UK borrowing costs into next year.
