Bank of England holds rates steady in narrow vote ahead of Autumn Budget

LONDON — The Bank of England on Thursday voted narrowly to hold interest rates steady, exercising caution ahead of the government's Autumn Budget in November.

Out of the BOE's nine-member monetary policy committee, five members voted to hold the key interest rate, known as Bank Rate, at 4%, while four opted for a 25 basis point cut.

The vote was slimmer than expected with economists polled by Reuters expecting a 6-3 split in favor of a hold.

The BOE said in a statement that the inflation rate, at 3.8% in September, had likely peaked and that a disinflationary trend was underway. This was "supported by the still restrictive stance of monetary policy," it said.

"This is reflected in an easing of pay growth and services price inflation. Underlying disinflation is being underpinned by subdued economic growth and building slack in the labour market," the bank added.

The BOE cautioned that future rate cuts "will therefore depend on the evolution of the outlook for inflation. If progress on disinflation continues, Bank Rate is likely to continue on a gradual downward path."

"I think this is the doves winning the argument," Victoria Clarke, U.K. chief economist at Santander CIB, told CNBC Thursday.

"[BOE Governor Andrew] Bailey has made it clear he wants a bit more data and that was certainly my judgement, that there is a lot of value in waiting for December. You've got two more CPI [inflation] prints coming and two more labor market prints and, of course, this massive budget," she told CNBC's Decision Time.

Yields on U.K. government bonds fell across the board, with the yield on the benchmark 10-year gilt shedding almost 3 basis points. Meanwhile the British pound trimmed earlier gains to trade 0.18% higher against the U.S. dollar.

The meeting on Thursday was the last one before the Autumn Budget later this month. Economists had said that while they believed the central bank was more likely to hold rates steady, it was not a given.

"We can never know for sure which way any meeting will go, but this one is ... one of the hardest to call for some time," Dean Turner, chief euro zone and U.K. Economist at UBS Global Wealth Management's Chief Investment Office, had said Tuesday.

"It's not a case of whether they will cut interest rates at some point — the answer to that is yes, we believe they will ... if policy is tight, inflation is falling, and growth is lacklustre, then interest rates are going to come down. The hard part is anticipating when," he added.

Economists had forecast, for the most part, that a majority of the BOE's policymakers would vote to keep its key interest rate, known as Bank Rate, unchanged at 4% at its November meeting.

There were some dissenters, however, with the likes of Barclays, Nomura, Mizuho and Unicredit believing there could be a surprise cut today, to 3.75%. Julien Lafargue, chief market strategist at Barclays Private Bank, conceded Wednesday that while there was a case for a rate cut, it was "a very finely balanced decision."

In any case, there is a general consensus that rate-setters could trim rates as soon as December, and will cut again over the coming year in response to expected cooling inflation — the rate of which remained unchanged for the third consecutive month in September, at 3.8% — and a softening of labor market data.

Most MPC members are more concerned about the implications of cutting rates too quickly rather than too slowly, Oxford Economics noted in analysis, and the BOE will want to see evidence of sustained downside surprises in the data and pay growth slowing to a target-consistent pace before voting to cut again.

"If we are right and the BOE pauses [this] week, the question will then turn to when the next cut will come," Allan Monks, chief U.K. economist at JP Morgan, said in a note.

"We have argued that further downside surprises in the inflation and labour market data will determine that. For example, a move up in the unemployment rate to 4.9% in September could be significant, as well as further soft sequential gains in core CPI services and private pay."

Assuming the BOE does hold rates on Thursday, UBS' Turner said that he expects the central bank to then "signal that a cut is coming no later than February — maybe as soon as December."

"Policymakers will not be armed with fresh forecasts in December, but they will have the budget and the impact analysis in their pockets," he said.

The fact the central bank's meeting this month comes ahead of the upcoming Autumn Budget on Nov. 26 is another reason for the BOE's policy makers to pause for thought.

It's widely expected that Chancellor Rachel Reeves will announce tax rises as she looks to fill a fiscal black hole estimated to be anywhere between £20-50 billion ($20-$65.2 billion), based on assumed forecasts of lower productivity, servicing debt and the cost of U-turns on welfare spending cuts, among other things.

Earlier this week Reeves gave a clearer indication that tax rises are coming and is she is expected to consider increasing income tax as one way to raise revenues, but she has not given any further detail. Tax rises would likely act as another damper on inflation by reducing consumer demand.

"If the measures [in the budget] include a hike in income tax, they would add to the drag on households' real incomes from high inflation and slowing pay growth. As these factors weigh on demand inflation will likely ease," Andrew Wishart, economist at Berenberg, said in a note Friday.

"If so, this will allow the Bank of England to cut interest rates by 25 basis points at least twice next year to 3.50%. A front-loaded fiscal tightening would open the door to a third cut in 2026, to 3.25%," he added.