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The Bank of England kept borrowing costs steady at 3.75 per cent in a knife-edge decision as it signalled that a further rate reduction could come as soon as March.
The Monetary Policy Committee voted five to four to keep the key rate unchanged after lowering it by a quarter point in December.
The tighter-than-expected decision came as the BoE cut its GDP forecasts for the next two years and raised its unemployment outlook, while predicting that a weakening labour market would help keep price pressures in check.
The BoE said that it expected inflation to fall back to around its 2 per cent target from April, “owing to developments in energy prices” including from last year’s Budget.
BoE governor Andrew Bailey cautioned in December that policy decisions are becoming a “closer call” as he weighs conflicting evidence on the economy. The UK jobs market is weakening even as activity indicators point to improving growth late last year.
UK inflation rose more than expected to 3.4 per cent in December, driven by higher tobacco prices and airfares. The BoE’s target rate is 2 per cent.
The pound weakened as investors reacted to more votes than expected for cuts. Sterling extended a decline begun earlier in the day amid speculation about the future of Sir Keir Starmer’s Labour government, trading 0.7 per cent lower against the dollar at $1.357.
This is a developing story