BOE's Cautious Approach to Rate Cuts Ends Year of Unfulfilled Expectations

The Bank of England (BOE) is set to conclude 2024 with interest rates a full percentage point higher than initially predicted by market analysts, according to a reported published by Bloomberg. While the central bank is expected to keep rates unchanged at its meeting on Thursday, marking the end of a year that saw the BOE adopt a much more cautious stance than anticipated, the path ahead remains uncertain.

At the beginning of the year, investors were expecting as many as six interest-rate cuts as the UK sought to emerge from a mild recession and combat high borrowing costs. However, the BOE has only implemented two cuts in 2024, in August and November, as officials prioritized containing inflationary pressures in the tight labor market.

"The BOE entered the year expecting to cut rates aggressively. Instead, they've ended up lagging behind other central banks and have had to navigate a difficult political environment," said a source to Bloomberg.

This divergence in monetary policy has resulted in the pound becoming the best-performing Group of 10 currency this year. However, the BOE's cautious approach has drawn criticism from businesses, consumers, and homeowners who argue that the central bank has inflicted unnecessary pain.

The BOE's shift away from its initial easing path was partly driven by developments in the US, where the Federal Reserve (Fed) also pivoted to a more cautious approach as the US economy proved more resilient than expected. The BOE, meanwhile, remained unconvinced that it had fully tamed underlying price pressures in the UK services sector.

"The BOE is now falling behind both the European Central Bank, which has cut its deposit rate four times since June to 3% from 4%, and the US Federal Reserve," Bloomberg noted.

As the BOE heads into 2025, several factors remain unclear. The UK economy is at a crossroads, with growth stalling and inflation showing signs of picking up. The recent Labour government budget, which included a significant tax increase on employers, has added to this uncertainty.

"The BOE is in between the ECB, which is cutting fast as growth falters, and the Fed," said Nomura economist George Buckley.

The BOE will be closely scrutinizing upcoming data releases, including consumer price figures and jobs data, to assess the impact of recent policy changes and inform its future course of action.

"Next year is all about how the UK absorbs the budget changes," said Matthew Amis, an investment director at abrdn. "If the private sector is able to pass the extra costs onto the consumer, then that will be inflationary and we struggle to see the BOE cutting three times."