UK Keeps Base Rate at 3.75%... BOE Says "Room for Further Cuts This Year"

Four of Nine MPC Members Back Cut
More Dovish Than Markets Expected
Growth Forecast Revised Down from 1.2% to 0.9%

The Bank of England (BOE), the central bank of the United Kingdom, has kept its base rate unchanged at 3.75% per annum. However, as more members of the Monetary Policy Committee (MPC) than expected voted for a rate cut, market expectations for a reduction within this year are actually growing.

Bank of England, Reuters, Yonhap News

The BOE announced that at the MPC meeting held on the 5th (local time), it decided to maintain the base rate at the current level of 3.75%. Of the nine members of the Monetary Policy Committee, five voted in favor of keeping the rate on hold, while four argued that the base rate should be lowered by 0.25 percentage points to 3.5%. The market had expected only about one or two members to call for a rate cut, but the actual vote turned out to be far more dovish than anticipated.

BOE Governor Andrew Bailey said, "We kept rates unchanged at this meeting to ensure that inflation does not rise again," but added, "If everything proceeds smoothly, there is room to cut the base rate further this year." The BOE statement also said, "Based on the evidence to date, it is more likely that the base rate will be reduced further," while explaining that the size and timing of any easing would be decided carefully in line with changes in the inflation outlook.

Price levels in the United Kingdom are still weighing on the BOE's policy decisions. In December last year, the consumer price index (CPI) rose 3.4%, significantly above the BOE's 2% target. However, the BOE projected that, due to factors such as lower energy bills and falling wholesale gas prices, the inflation rate will approach the target from April this year. This brings forward the timing compared with its previous forecast, which had expected inflation to fall back into the 2% range next year.

With this decision, the UK base rate of 3.75% remains at its lowest level in 2 years and 10 months. Since August last year, the BOE has implemented six base rate cuts. Reuters reported that, following this meeting, interest rate futures markets have priced in expectations that the base rate will be cut by an additional 0.50 percentage points by the end of the year. This is a larger reduction than the 0.35 percentage point cut that had been priced in before the meeting.

Meanwhile, the BOE has downgraded its outlook for UK economic growth. Its forecast for this year’s gross domestic product (GDP) growth has been lowered from 1.2% to 0.9%, and next year’s growth forecast has also been revised from 1.6% to 1.5%. The BOE assessed that high living costs are constraining household economic activity, particularly consumption. By contrast, it expects the unemployment rate to rise to 5.3% this year, higher than its previous forecast of 5.0%.

Market participants are focusing less on the rate hold itself and more on the fact that there were more votes for a cut than expected, interpreting this as a sign that the BOE’s monetary policy stance is gradually shifting into an easing phase.