(Bloomberg) -- The Bank of England cut interest rates to the lowest in over two years in a closer-than-expected decision that leaves investors with what Governor Andrew Bailey called "genuine uncertainty" on its next move.
The Monetary Policy Committee split 5-to-4 in favor of reducing rates by a quarter-point to 4% after deadlock forced it into an unprecedented second vote. The prospect of another reduction this year is now shrouded in doubt.
The decision saw two senior officials vote against Bailey, and featured new forecasts warning that inflation will now hit 4% in September — a reading that would be double its target and arrive just weeks before its next projections in November. The BOE also hinted at slowing the pace of so-called quantitative tightening in an annual review next month, warning of signs of strain in long-dated bonds.
Thursday's outcome showed rate-setters growing more concerned over an unsettling resurgence in inflation driven by a spike in food bills, with retailers blaming the Labour government's recent hike in payrolls taxes and the minimum wage. Officials are balancing those risks against mounting jobs losses and a "subdued" economy that could dampen future price pressures.
The BOE's overtones of uncertainty chime with the sense of wait-and-see on display at global peers, with the Federal Reserve having held off on a rate cut so far this year to gauge inflation risks, and the European Central Bank committed to closely assessing the economy before determining its next move.
Bailey did insist in a press conference that the path for borrowing costs "continues to be downward" and that inflation will be temporary. However, he was more wary on when the next cut may arrive.
"There is, however, genuine uncertainty now about the course of that direction of rates," he said.
It prompted investors to consider that a move in November — which would continue its once-a-quarter pace of cuts — now hangs in the balance. Money markets reduced wagers on the extent of rate cuts from the BOE, with the chances of one in November seen as less than 50/50. The pound jumped against the dollar, climbing 0.5% to $1.3431.
"The statement hints that officials think the easing cycle is nearing its end," said James Smith, developed market economist at ING. "Policymakers are visibly worried about a more persistent bout of inflation as the headline number is way higher than target."
Bailey described the judgment as "finely balanced," with the split among officials so fragmented that an unprecedented second vote was needed to break the deadlock. That followed a three-way outcome without a majority. It was the first time in the MPC's 28-year history that two rounds of voting were required for a presentable decision on rates.
The opposition to more cuts in borrowing costs unexpectedly grew since the last time the MPC loosened policy in May, and two internal policymakers voted against the governor — Chief Economist Huw Pill and Deputy Governor Clare Lombardelli.
The BOE still stuck with overall guidance steering markets toward more "gradual and careful" easing, warning of emerging slack in the economy and cooling demand for workers. In opening remarks, Bailey cautioned that "it remains important that we do not cut Bank Rate too quickly, or by too much."
Chancellor of the Exchequer Rachel Reeves said the rate reduction is "good news," in remarks that didn't refer to the UK's current economic challenges and the impact of her policies. Tax data suggest 185,000 jobs have been lost since the Labour government announced plans to increase employers' payroll taxes and the minimum wage.
However, the MPC also said that upside risks to consumer prices have "moved slightly higher since May," and pointed to rising food bills in particular. Officials now expect inflation to hit 4% in September, up from the previously predicted peak of 3.7%, and the panel "remains alert" to second-round effects.
The BOE's own survey of firms points to growing stagflation risks, with businesses expecting to put up their own prices by 3.7% in the year ahead, 0.1 point more than reported in the three months to June. Their outlook for employment growth over the next 12 months deteriorated, and wage growth expectations remained sticky at 3.6%, too hot for comfort.
What Bloomberg Economics Says:
"We remain of the view that a November cut is more likely than not, but with inflation heading for 4% in the autumn, it is far from a done deal."
—Dan Hanson, chief UK economist. For his BOE REACT, click here
"Nervousness about the labor market might prompt another cut in November. But this will be difficult to justify unless disinflation is clearly under way," George Brown, a senior economist at Schroders, said in a report. "We think there is a decent chance rates will not fall below the current rate of 4% this year."
While the forecast for economic growth in 2025 was also upgraded slightly to 1.25% following a strong first quarter, they said the underlying picture "remained subdued."
Officials also noted that policy was becoming less of a drag on the economy, and linked future cuts to further progress on bringing inflation down in the medium term.
"The timing and pace of future reductions in the restrictiveness of policy will depend on the extent to which underlying disinflationary pressures continue to ease," the minutes said. "The restrictiveness of monetary policy has fallen as Bank Rate has been reduced."
--With assistance from Andrew Atkinson, Alice Gledhill, Greg Ritchie, Ben Priechenfried and Irina Anghel.
(Updates with rate prospects starting in second paragraph)
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