UK Holds Base Rate at 4% but Signals Possible Cut Next Time

MPC Holds Rates Steady at 4% Per Annum
Four Out of Nine Members Favor 0.25 Percentage Point Cut
"Inflation Has Peaked... Gradual Rate Cuts Possible"

The Bank of England (BOE), the central bank of the United Kingdom, held a Monetary Policy Committee (MPC) meeting on the 6th (local time) and decided to keep the base interest rate unchanged at 4.00% per annum.

Andrew Bailey, Governor of the Bank of England (BOE) Reuters Yonhap News

The UK base rate, which had been lowered five consecutive times from August last year to August this year, was kept unchanged at the September MPC meeting and remains unchanged this time as well. The 4.00% rate is the lowest level since February 2023.

At this MPC meeting, five members, including BOE Governor Andrew Bailey, voted to maintain the rate at 4.00%, while four members voted to cut it by 0.25 percentage points to 3.75%. In a statement, Governor Bailey said, "We have balanced the risk of persistently high inflation above our target with the risk that weakening economic demand could push inflation too low. If inflation remains on a normal trajectory, we expect that gradual additional rate cuts may be possible."

In fact, the UK's Consumer Price Index (CPI) inflation rate in September was 3.8% year-on-year, lower than the forecast of 4.0%, but still above the BOE's 2% target and the highest among the Group of Seven (G7) countries. The BOE also had to consider the potential impact of the budget announcement scheduled for the 26th on the economy. Some have interpreted the unusual speech made by Chancellor of the Exchequer Rachel Reeves on the 3rd, in which she said, "We will do whatever is necessary to protect households from high inflation and interest rates," as a call for the BOE to cut rates.

The UK's base rate is similar to that of the United States (3.75-4.00%) but is twice as high as the eurozone's deposit rate (2.00%). Before the rate decision, the futures market on the morning of the 6th suggested a roughly 25% probability of a rate cut to 3.7%. However, for the final MPC meeting of the year scheduled for December 18, the likelihood of a 0.25 percentage point cut was predicted to be 70%. The BOE also signaled the possibility of further cuts, stating, "We believe the CPI inflation rate has peaked. It is likely that interest rates will continue on a gradual downward path."

Meanwhile, for the first time, the BOE released the individual outlooks of each MPC member. Governor Bailey, who voted to hold rates, noted that the risks surrounding medium-term inflation have become more balanced recently and predicted that if inflation slows more noticeably, there is a possibility of a rate cut. Major UK media outlets interpreted this as an indication that Governor Bailey may shift toward a rate cut in the next vote.