- BoE cuts rates to 3.75% in tight 5-4 vote
- Governor Bailey supports rate cut, shifting MPC balance
- Sterling rises, bond yields increase post-BoE decision
LONDON, Dec 18 (Reuters) - The British pound reversed an earlier fall and gilt yields turned higher even though the Bank of England cut interest rates on Thursday, as policymakers remained divided and hinted there was limited space for more easing.
The BoE's rate-setting Monetary Policy Committee voted 5-4 to lower borrowing costs by a quarter-point to 3.75%, its fourth rate cut this year, but it signalled it would continue to cut rates gradually, despite a slowdown in inflation and signs of a weakening labour market.
The pound , which had been lower earlier in the day, reversed course and was last up 0.2% at $1.3405. Against the euro, the pound was up 0.4% at 87.44 pence.
UK government bond yields climbed after the decision, with the benchmark 10-year gilt yield rising 3.5 basis points to 4.515%.
The two-year yield , which is sensitive to changes in BoE policy expectations, rose 5 bps to 3.765%.
POLICYMAKERS DIVIDED
The MPC has been almost evenly split for two straight meetings, after voting by five to four to keep rates on hold last month.
Governor Andrew Bailey changed his view this time around by voting for a cut, tipping the balance.
"We still think rates are on a gradual path downward," Bailey said in a statement. "But with every cut we make, how much further we go becomes a closer call."
While most analysts still expect the BoE to lower borrowing costs further next year, the scale and timing of future rate cuts remains uncertain.
"We narrowly expect another cut in February, but it's a close call," said ING economist James Smith in a note.
"There’s only one more round of inflation and wage/jobs data before then, suggesting the views of the committee won’t shift enormously over the next eight weeks."
Markets pushed back their expectations for further easing. The next rate cut is now not fully priced until the June 2026 meeting, whereas previously it had been expected by April.
"If there is a reaction in sterling to rally, it will be perfectly predictable,” said Neil Parker, head of economics and market strategy at Moneycorp.
The moves in bond yields and the currency largely reversed a fall the day before, after UK inflation in November was softer than expected.
Britain's consumer price inflation fell to 3.2% in November, its lowest since March. The median forecast in a Reuters poll of economists had been for a decline to 3.5%.
In a busy day for central banks in Europe, the European Central Bank, Sweden's Riksbank and Norway's Norges Bank all kept their main policy rates on hold.
Reporting by Samuel Indyk. Editing by Susan Fenton and Mark Potter
Source: Reuters