The Bank of England kept borrowing costs on hold on Thursday, but a narrow vote and indications that Governor Andrew Bailey may soon join those calling for a rate cut make a December move more likely after the government’s budget later this month.

In light of Britain’s still-high headline inflation rate, the nine-strong monetary policy committee voted 5-4 to keep the central bank’s benchmark bank rate at 4.0%, the BoE said.

Most economists polled by Reuters last week had predicted a 6-3 decision by the MPC to keep bank rates unchanged.

The MPC sees a greater risk of weak demand in the economy while the likelihood of inflation sticking too high has receded, the central bank said.

While Bailey was among those who decided to keep borrowing costs unchanged, he was only one in five who felt the risk of inflation had declined.

He said the inflation outlook was at a “very important moment” but felt it was “worth waiting for further evidence” of economic growth ahead this year.

Deputy Governors Sarah Breeden and Dave Ramsden were in a minority of four demanding rate cuts.

The pound fell around a third of a cent against the US dollar before the recovery and short-dated British government yields fell by a relatively modest two basis points after the announcement.

The MPC’s next rate decision is due on December 18.

“More clarity on fiscal policy post-Budget, plus key data releases on inflation and the labor market, will be enough to persuade most MPC members to vote for a rate cut,” said KPMG UK chief economist Yael Selfin.

Sanjay Raja, chief UK economist at Deutsche Bank, said he also believed the BoE would cut rates next month and cut the bank rate to 3.25% by the summer.

“The big question now is whether there is enough dovish momentum in the data to support a faster cut in Bank Rate in the first half of next year,” Raja said.

BOE says UK inflation has peaked

Britain’s inflation of 3.8% is the highest among the Group of Seven major advanced economies and the BoE’s benchmark interest rate is twice that of the European Central Bank, adding to the challenge for the government to speed up the economy.

However, inflation was unexpectedly steady in September and the latest jobs data also signaled weakness in price pressures.

The MPC said it believed inflation had peaked and would decline in October and November data as weak economic growth and a deteriorating job market took their toll on demand.

“We still think rates are on the way down, but we need to make sure inflation is on track to return to our 2% target before we cut them again,” Bailey said.

Thursday’s decision marked the first break in the BoE’s already-sequential, once-every-three-month rate cuts starting in August 2024.

The BoE forecast that inflation would remain above its 2% target until the second quarter of 2027 – the same as in August – although it predicted that inflation would be slightly lower, at 1.9%, after that, and also pointed to weakness in the job market.

In another sign of its concern about the economic slowdown, the central bank expressed concern that households might not use their higher levels of savings to spend more.

Guidance changes

As part of a wider overhaul of how it explains its thinking, the MPC tweaked its key message about the outlook for rates.

A line from earlier statements that he believed a “gradual and cautious approach” to lowering rates was appropriate was replaced by the phrase: “If progress on disinflation continues, Bank Rate is likely to move gradually downwards.”

The decision to keep rates on hold did not come as a surprise to investors. Interest rate futures prices on Wednesday indicated just a one-in-three chance of a quarter-point cut.

Bailey said the current market price is close to “a fair description of my current position.”

However, the 5-4 vote split and signs that Bailey may soon switch camps are likely to increase bets on a rate cut in December.

Investors were pricing in about a 55% chance of a bank rate cut next month.

By then, the MPC will have seen official inflation and jobs data for October and November and will know that Finance Minister Rachel Reeves’s budget contains the extent of the widely expected tax hike.

He is expected to announce sweeping tax hikes in his budget on November 26, likely to weigh on the economy.

The BoE published a summary of the views of individual MPC members for the first time as part of an overhaul of its forecasting process after it was widely criticized when British inflation peaked at 11% in October 2022, and it explains its thinking.

It forecasts economic growth of 1.5% for this year, up from its previous forecast of 1.25%, and 1.2% for 2026, little changed from August estimates.