What to expect from December's Bank of England meeting

After a dizzying ascent, the Bank of England (BoE) has held interest rates steady at 5.25 per cent since August (see chart). But although rates have plateaued, divisions between rate-setters only look set to increase. Could we see the first votes for a cut in the December meeting?

Hawks vs doves? 

For most of the year, policymakers have been a pretty agreeable bunch, as the table shows. When the inflation rate was in double digits, the risks of raising interest rates (slower growth and rising unemployment) paled in comparison to the benefits for wrestling inflation back under control.

But it takes over 18 months for the full force of rate hikes to hit the economy, meaning that around half of the impact is yet to feed through. Interest rates are such a blunt tool that even rate-setters warn that it is impossible to ‘fine-tune’ monetary policy. 

The economic backdrop is also decidedly mixed. We tend to describe policymakers as ‘hawks’ if they prioritise squashing inflation, even at the expense of other variables such as unemployment or spending. A ‘dove’ places greater emphasis on supporting growth, often favouring a looser policy stance. And there is currently plenty of fuel for both. 

Source: Bank of England 

Why do some policymakers still want to raise rates? 

Inflation may have fallen to 4.6 per cent, but it is still a long way from the 2 per cent target – and has been for years. Will people start to see high inflation as the norm? 

In late November, rate-setter Catherine Mann highlighted the risk of “backward-looking price and wage setting behaviours”: if people adjust their wage and price demands in response to yesterday’s high inflation rate, higher inflation can become entrenched. Mann said that “the appropriate path is one that exhibits a higher peak in [the] bank rate”, and voted for a further hike in November. 

High wage inflation (7.7 per cent in the three months to September) and recruitment difficulties are also a concern. Jonathan Haskel said that there is probably no scope for moderation in rates anytime soon because "the labour market is still historically tight". He also voted for a rate hike in the latest meeting. 

Last week, rate-setter Megan Greene said that policymakers must “balance the risks of inflation persistence with those of exacerbating the weakness in activity we’re already seeing”. Though the decision has become more finely balanced, she continues to “worry more about the risk of inflation persistence”. 

And why do some want to cut them?

Yet the UK economy is already flatlining: neither growing nor contracting in the third quarter of the year. There is mounting evidence that interest rates have started to weigh on economic activity, especially as higher mortgage rates feed through to growing housing costs. 

Swati Dhingra has voted to keep rates on hold since December 2022 – when the Bank Rate was a far lower 3 per cent. She was joined at the time by fellow rate-setter Silvana Tenreyro, who has since been replaced on the Monetary Policy Committee (MPC) by Megan Greene. Even a year ago, Dhingra and Tenreyro stressed the long lags associated with monetary policy, and the impact of past rate hikes still to come through. 

Minutes for the November meeting stated that: “for one member, the risks of over tightening policy had continued to build”.