Bank of England holds interest rates as it slashes UK growth forecasts to zero

The Bank of England opted to maintain interest rates at 4.75 percent today, concurrently revising its economic forecasts for the UK towards a state of stagnant growth. Fewer members than anticipated, six out of nine from the Bank’s Monetary Policy Committee, voted in favor of holding interest rates steady, with three members calling for a cut by 0.25 percent due to concerns about a weakening economy.

Growth forecasts for the UK's final quarter of 2024 were sharply reduced to zero, a drop from the previous month's projection of a 0.3 percent increase, as GDP experienced a slight contraction of 0.1 percent during September and October, as reported by City AM.

"The prospective increase in labour costs from higher National Insurance contributions from next April, announced in the Budget, is currently weighing heavily on sentiment," commented the Bank. As a response to the anticipated rise in National Insurance, businesses are contemplating reducing their workforce, increasing investments in automation, and offshoring jobs.

Despite poor growth prospects, inflation apprehensions remain a significant worry for the Bank. It noted that early reactions to the Budget have indicated a "risk of greater upward pressure" on inflation than was initially expected.

The recent Budget measures could cause a spike in prices, particularly affecting food, drink, hospitality, leisure, and care sectors, leading to an uptick in CPI inflation next year.

Moreover, the Bank raised its pay increase forecasts for the coming year to between three and four percent, up from the former range of two to four percent set out in earlier estimates.

The Office for National Statistics released higher-than-expected earnings data earlier this week, reporting a 5.4 percent rise, surpassing market predictions of 4.6 percent. Inflation data also unveiled this week showed a November increase in prices by 2.6 percent, climbing from October's 2.3 percent.

The Bank anticipates a near-term continuous rise in inflation, with the upcoming Budget likely to boost price increase rates by a further 0.5 percent. "We think a gradual approach to future interest rate cuts remains right, but with the heightened uncertainty in the economy, we can’t commit to when or by how much we will cut rates in the coming year," said Governor Andrew Bailey.