Policymakers said inflation is easing, but not yet fast enough to cut.
The central bank left its main lending rate unchanged at 4.25 per cent on Thursday, the third consecutive meeting at which policymakers have chosen to wait. The decision was widely expected by markets, but the vote was closer than in October: six members of the nine-strong monetary committee backed a hold, while three voted for a quarter-point cut. In September the split had been eight to one.
In its statement the committee said headline inflation had fallen to 3.1 per cent in the year to October, from a peak of more than six per cent eighteen months ago, and that price rises in goods had “largely normalised”. But it warned that services inflation, which tracks wages more closely, remained stubborn at 4.4 per cent, and that it wanted “further evidence that the easing is durable” before lowering borrowing costs.
Why the bank is still waiting
The committee’s central concern is the labour market. Regular pay growth has slowed, but only gradually, and is still running at around 4.8 per cent a year, well above the level the bank regards as consistent with its two per cent target. Employers in hospitality, care and construction continue to report difficulty filling vacancies, and the bank’s regional agents, including those covering Calder and Port Selwyn, said many firms still planned pay settlements above four per cent for next year.
“We have made real progress, and households are beginning to feel it,” the governor, Helena Marchbank, told reporters after the decision. “But the last part of the journey is often the hardest. Cutting too early and having to reverse course would do far more damage than waiting a few more weeks to be sure.”
Marchbank declined to say whether a cut was likely in December, repeating that each meeting would be “live” and decided on the data. Minutes published alongside the decision, however, showed that a majority of the committee now believes the next move will be downward, and that several members thought the case for a cut “had strengthened materially” since the summer.
How markets reacted
The currency weakened by about 0.4 per cent against a basket of trading partners in the minutes after the announcement, as traders read the three dissenting votes as a sign that easing is close. Two-year government bond yields, which are sensitive to interest rate expectations, fell by six basis points to 3.71 per cent. Futures markets now price roughly a seventy per cent chance of a quarter-point cut at the December meeting, up from around fifty per cent a week ago.
Shares in housebuilders and retailers, which tend to benefit from lower borrowing costs, rose modestly on the regional exchange. Banks slipped slightly, reflecting expectations that margins on lending will narrow as rates come down.
Callum Ferrars, chief economist at a Calder-based investment house, said the vote split was more significant than the decision itself. “Three dissents is the committee telling you which way the wind is blowing,” he said. “The bar to a December cut is now a single decent set of wage figures. If pay growth in next month’s release comes in below 4.5 per cent, I think they move.”
What it means for borrowers
For households the immediate effect is limited. Around four in five mortgage holders in the region are on fixed-rate deals, and lenders have already been trimming the price of new two- and five-year fixes in anticipation of cuts. Brokers in Calder said the average two-year fixed rate had fallen to around 4.6 per cent, down from more than five per cent in the spring. Those on tracker and variable mortgages will see no change this month.
Savers, meanwhile, have a little longer to lock in current rates. Easy-access accounts paying more than four per cent are becoming harder to find, and several building societies have already cut their best fixed-term bonds. Consumer groups advised anyone with cash sitting in a low-paying current account to move it before the next round of reductions.
The bank will publish its quarterly forecasts alongside the December decision, which falls a week before the Christmas recess. Business groups, including the Calder Chamber of Commerce, urged the committee to act then, arguing that high borrowing costs were holding back investment in the valley’s manufacturing firms. Unions, for their part, said any cut should not come at the expense of efforts to protect real wages after two difficult years.
