In the City, there was no doubt that the Bank of England would keep interest rates at 4.75%. The Monetary Policy Committee (MPC) was widely expected to cut interest rates for the third time this year after a sharp rise in annual inflation last month and a sharp rise in wages in the autumn.
Even more surprising to many is the yawning difference between the six committee members who voted to keep rates unchanged and the three who voted to cut rates.
Those who voted to do nothing, including Governor Andrew Bailey. Chief Economist Hugh Pill. Monetary Policy Director Claire Lombardelli also cited threats to the Bank's mandate to keep inflation at its 2% target, with wage increases exceeding 5% in October and inflation rising for three months. He cited a consecutive increase of 2.6%. final count.
They are also concerned about long-term constraints on the labor market due to high levels of disease and poor health. This constraint appears to deny employers the supply of needed skilled labor, forcing them to pay higher wages. Not just this year, but probably in the future as well. For many years to come.
Rising wages will have the effect of boosting inflation over the next two years if companies can convince consumers that they have to accept the pain of higher production costs. Continued rises in wages above the rate of inflation will also increase demand for goods across the high street, prompting retailers to increase prices further.
On the other side of the debate are three dovish figures who look to current wage and inflation data to assess the state of the economy and post-Labour's first budget.
They are concerned about the World Bank's assessment of economic growth in the fourth quarter, which officials downgraded from 0.3% to zero. This could be interpreted as a denial of Labor's desire to boost growth in the November budget.
But a struggling economy needs recovery from somewhere, and that could come from lower borrowing costs. You might say that that is the job of a central bank.
Others believe recent wage increases are still linked to the cost of living crisis and workers' efforts to recoup some of their losses over three years, when average prices were added more than 20%.
At present, the wage increases that are pushing up the average are largely due to government benefits from successive increases in the minimum wage. NHS bonuses are also reflected in wage data, boosting average earnings, but this factor will be removed in the new year.
Then there's the savings rate, which has edged up since last year, showing that many households are wasting much of the disposable income they've gained from higher wages rather than spending it at all.
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Perhaps the uncertainty around the budget is influencing their thinking. Perhaps the threat of tax increases, such as the 5% rise in council tax next April, is deterring consumers from opening their wallets.
Whatever the reason, unless someone is prepared to take decisive action, the forecast of zero growth in the fourth quarter could turn negative next year and a recession could loom.
If the dovish argument prevails at the next MPC meeting in February 2025, a cut to 4.5% is likely, but as of Thursday afternoon, the market was pegging the probability of the rate unchanged at 55%.
Will borrowing costs fall even more significantly next year? Investors say not. They don't expect a recession and are betting on one more cut to 4.25% by the end of the year. This scenario would plunge the UK into another period of stagnation and undermine the government's attempts to move the economy forward.
