The decision matched most analysts’ expectations - only ten of fifty economists polled by Bloomberg thought the Bank’s monetary policy committee would vote to reduce rates for a second consecutive month. But short sterling futures fell after the news as markets had priced in a higher possibility of a cut.
MPC members will have felt the relative calm now prevailing in credit markets removed some of the pressure for rapid action, allowing them to wait to February when the committee can set out its thinking more fully in its next inflation report.
By next month, the Bank will have more information both on the extent to which consumers may be reining in spending - after ominous trading updates from Marks and Spencer and other retailers - and on new risks to its inflation outlook.
The key argument for waiting is that the news on near term influences on inflation has been poor: oil prices near $100 a barrel, a renewed rise in domestic energy tariffs, and a sharp move down in the trade weighted exchange rate,” Malcolm Barr, economist at JPMorgan, said on Wednesday.
The MPC will be on the lookout for any pickup in wage inflation, after early data on a small number of pay deals suggested settlements were becoming more generous. But the most striking development of the last month has been sterling’s decline, which economists said could be viewed as an effective easing in monetary conditions of around 100 basis points.
The last month’s economic data suggests UK activity has been subdued, but not conclusively weaker - shaky sentiment in manufacturing and retail contrasted with a slight recovery in service sector activity, labour market indicators remained benign, and surveys gave a mixed picture even of the gloomy housing market.
However, minutes from the December meeting said that signs of slowing growth in the industrial world...suggested a substantial loosening in policy might be needed”. Expectations will now strengthen that the MPC is preparing to cut rates in February - not least because of the worsening outlook for the US economy.