Bank of England leaves key rate unchanged despite signs of economic slowdown

The Bank of England left its key interest rate unchanged at 4.75 percent on Thursday, saying it will need to keep the brakes on the economy for a while yet, despite signs of a slowdown in the last months of the year.

The nine-strong Monetary Policy Committee split 6-3, with external members Swati Dhingra and Alan Taylor both voting for a quarter-point cut to 4.5 percent, along with Deputy Governor for Markets Dave Ramsden.

“A gradual approach to removing monetary policy restraint remains appropriate,” the Bank said in a statement accompanying the decision, despite acknowledging that “most indicators of U.K. near-term activity have declined.”

“Monetary policy will need to continue to remain restrictive for sufficiently long until the risks to inflation returning sustainably to the 2 percent target in the medium term have dissipated further,” it added.

The Bank repeated its priority to squeeze remaining inflation pressure out of the system. But it has suffered two setbacks this week alone.

On Tuesday, new data from the Office for National Statistics showed wage growth accelerating for the first time since July last year. On Wednesday, the ONS published data showing the headline rate of inflation rose in November, for the second month in a row, to 2.6 percent.

The picture looks considerably worse when stripped of volatile factors such as food and energy, with the core rate of inflation rising to 3.5 percent .

Inflation has come down sharply from a peak of over 11 percent in 2022. But getting it to stick at 2 percent, the Bank’s medium-term target, is proving difficult.

The Bank estimates the government’s October budget will add 0.75 percent to the economy over the next 12 months, but it will also keep inflation just under half a percentage point higher than it would otherwise have been.

The key test will come next April, when a big expansion of employers’ National Insurance obligations will come into effect. Companies such as Marks & Spencer and Sainsbury’s have warned of a big hit to their profits, with possible price increases as a result.