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The Bank of England kept interest rates at 4.75 percent as it tries to fight stubborn inflation and growing unemployment.
In the sixth to third decision, the majority of the members of the Monetary Policy Committee warned that the recent increase in wages and prices “increased the risk of the persistence of inflation”, dampening the prospects of a rapid reduction in the rate in 2025.
“We think a slow approach to reducing future interest rates is always good,” said Andrew Bailey, The BoE the governor. “But with increasing economic uncertainty, we cannot commit to when or how much we will cut rates next year.”
He added that the BoE must ensure that it can meet the “2 percent inflation target on a sustainable basis”.
Rob Wood, UK economist at Pantheon Macroeconomics, said the minutes of the meeting were “cautious and therefore hawkish over the sixth to third topic”.
He added that inflation was likely to rise above 3 percent in the spring, “with a significant increase in prices that could disrupt expectations of inflation that is already above average and rising”.
The BoE's tough language came a day after the US Federal Reserve indicated it would slow down its rate of reduction next year amid signs of persistent inflation.
The UK central bank is battling rising inflation and two consecutive months of falling GDP, scaling back its plans to cut interest rates next year.
Thursday's decision, which was in line with forecasts from economists polled by Reuters, comes a day after data showed that Inflation in the UK rose to 2.6 percent last month, from 2.3 percent in October.
But the three MPC members who favored a quarter-point cut – deputy governor Dave Ramsden, Alan Taylor and Swati Dhingra – cited “soft demand” and a weak labor market.
“Due to the volatility of the risk profile, a less restrictive policy level was warranted,” they said.
BoE staff now expect zero growth in the final quarter of this year, weaker than forecast in November.
“Most of the UK's near-term indicators are bearish,” the central bank said on Friday.
It added that the risks to global growth and inflation from geopolitical tensions and trade policy uncertainty have “increased materially” – a clear reference to US president-elect Donald Trump's plans to raise import prices from the US.
Sterling and gilt yields fell slightly after the widely expected decision to hold rates. The pound fell to $1.261 after the BoE announcement, although it was still up 0.3 percent on the day.
The yield on two-year non-price-sensitive government bonds fell to 4.46 percent.
In recent weeks, however, government debt yields have risen, as investors are unfazed by inflation data and Labor's Budget plans to borrow more money.
Traders still expect the BoE to make two quarterly principals next year – the same as before Thursday's decision. That compares with four market expectations as recently as October.
“The poll was much tougher than the market had expected, suggesting it has gone too far recently to lower inflation rates next year,” said Lee Hardman, senior financial analyst at MUFG.
The BoE cut rates by a quarter at its previous meeting in November, but indicated at the time that another reduction was unlikely until 2025. It has cut rates twice in 2024 and is due to announce its next rate decision on February 6.