The Bank of England has maintained its guidance for “gradual” interest rate cuts next year, following surprise support for a reduction this month.

Its rate-setting committee, while deciding to keep Bank rate on hold at 4.75%, noted higher than expected wage rises and inflation despite a slowdown in the economy over the second half of the year.

However, three members backed a cut, meaning the vote came in at 6-3 in favour of no change.

Just one dissenting voice had been expected.

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Governor Andrew Bailey said: “We think a gradual approach to future interest rate cuts remains right, but with the heightened uncertainty in the economy we can’t commit to when or by how much we will cut rates in the coming year.”

Earlier this month, Mr Bailey voiced concerns about how businesses would react to budget measures, such as the hike to employer national insurance contributions from April.

Lobby groups and many individual firms have warned the additional costs will be passed on – risking further inflationary pressure.

Mr Bailey also noted a worry tit-for-tat trade tariffs would add to the acceleration in price growth. US president-elect Donald Trump has warned of tariffs covering all US imports as part of his agenda to protect US industry and jobs.

The Bank said on Thursday it was still evaluating the effects of the budget on the outlook.

It has also consistently spoken of the threat to rate cuts from salaries.

The Bank does not like wages going up too fast – currently at twice the rate of price growth – because it can fuel future demand in the economy and make inflation worse in the longer term.

Economists had been widely expecting four rate cuts in 2025 on the back of the two reductions this year as inflation fell back towards the Bank’s 2% target following the West’s energy-led price shock.

But financial markets, which had tipped a similar future path up until a few weeks ago, now see only two quarter point reductions priced in due to additional weight on inflation.

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However, the chances of a rate reduction at the Bank’s next meeting in February rose from near 50% to 66%, according to LSEG data after the minutes of the 18 December meeting were published.

Such a move would be broadly welcomed by millions of borrowers also still feeling the pinch from the wider cost of living crisis.

Prices have generally not been falling but rising at a much slower pace. Energy bill hikes for the coming winter are among the current pressures on household spending.

Chancellor Rachel Reeves said: “I know families are still struggling with high costs. We want to put more money in the pockets of working people, but that is only possible if inflation is stable and I fully back the Bank of England to achieve that.

“Improving living standards across the country is our number one focus, and is why I chose to protect working people’s pay slips from tax rises, froze fuel duty and increased the National Living Wage for three million people.”

Average water bills in England and Wales will increase by 36% over the next five years, the water regulator Ofwat has said.

The rise is equivalent to an average extra cost of £31 per year.

Water companies had asked for an average rise of 40%.

The regulator’s draft determinations issued in July said bills would rise by an average of 21% up to 2030.

It comes as almost 60,000 homes across Hampshire are without water because of a “technical issue” at a Southern Water supply works.

Southern Water customers will experience the biggest rise in the cost of bills of all eleven water and wastewater companies – a 53% hike. The company had sought an increase of 83%.

Customers of Wessex Water will have the lowest, 21%, bill rise.

The 16 million customers of the UK’s biggest water company Thames Water will see bills become 35% more expensive, below the 53% increase requested by the utility.

By 2030 a typical annual bill will cost £588.

Paying the most every year in five years’ time will be Dwr Cymru customers, with an average annual bill of £645.

Why are bills going up?

Bills are going up as the utilities face a range of problems – including higher borrowing costs on large levels of debt, creaking infrastructure and record sewage outflows into waterways.

Ofwat has now agreed to investment plans by the water companies. Funding this investment is another reason bills have been allowed to rise.

The regulator has approved £104bn in funding, above the £85bn agreed with firms in Ofwat’s draft determination but just below the £108bn the companies wanted.

Higher bills will not solve the financial woes at some of the utilities, including Thames Water, which this week won court approval to pursue the next phase in securing a £3bn emergency loan.

If approval had not been granted Thames Water told the High Court it would run out of cash by 24 March and would likely be pushed into a government-backed special administration regime.

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Ofwat chief executive David Black said: “We recognise it is a difficult time for many, and we are acutely aware of the impact that bill increases will have for some customers. That is why it is vital that companies are stepping up their support for customers who struggle to pay.

“We have robustly examined all funding requests to make sure they provide value for money and deliver real improvements while ensuring the sector can attract the levels of investment it needs to meet environmental requirements.”

The US central bank has announced an interest rate cut, just hours before the Bank of England is tipped to refrain from following suit.

The Federal Reserve cut its main funding rate by a quarter point to a new target range of 4.25%-4.5%, as markets had expected, but signalled that future reductions would happen more slowly.

A resurgence in the pace of inflation is a big worry, with the prospect of new trade tariffs under Donald Trump from 20 January also risking a leap in the pace of US price growth in the New Year as imported goods would cost more.

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Data on Tuesday showed resilient consumer spending among other reasons for Fed policymakers to be wary of inflation ahead.

The Federal Open Markets Committee expected two rate cuts in 2025. Market expectations had been for four just weeks ago, in line with the Fed’s September guidance.

Fed chair Jay Powell told reporters solid growth, improved employment and progress in the battle against inflation meant the central bank was in a “good place”.

But he acknowledged that “policy uncertainty” relating to the incoming Trump administration was a concern for the inflation outlook among some of the committee’s membership.

“We just don’t know very much at all about the actual policies, so it’s very premature to try and make any conclusion”, he added.

Government bond yields, which reflect perceived future interest rate paths, ticked upwards.

The dollar found support, gaining 0.5% against both the pound and euro, while major US stock markets retreated.

The Fed’s rate decision was announced just hours before the Bank of England gives its own rate verdict.

No cut is expected while financial markets are expecting a similar message on the possible interest rate path ahead.

UK yields – the effective cost of servicing government debt – have moved sharply higher this month, with the gap between British and German 10-year bond yields rising to its highest level in 34 years earlier on Wednesday.

It reflects the diverging interest rate outlooks for the Bank of England and European Central Bank, which has been cutting rates consistently to boost the euro area’s economy.

The UK’s problem is that the paces for both wage and price growth have accelerated.

At the same time, economic growth has stalled.

The scenario presents the Bank with a particular challenge.

Its governor Andrew Bailey has admitted that the budget’s effect on businesses is casting the biggest question mark over the future rate path.

Worries include the extent to which firms seek to recover costs from tax hikes and minimum pay rises in the form of price rises.

On the other hand, the pressure on wage growth could be eased if firms carry out their threat to limit pay growth as a result of the budget burden.

As it stands, UK borrowing costs look set to be higher for longer, hampering the economy as they are designed to do but also driving up the government’s bill to service its debts.

While the Bank is widely expected to hold off on a cut on Thursday, financial market forecasts for a reduction in February, seen as nailed on just weeks ago, are now running at just 50% in the wake of the latest wage and inflation data.

Just two rate cuts are priced in for 2025 currently.

What the Bank has to say about the price pressures it is currently seeing will be closely scrutinised.

Commenting on the US outlook Matthew Morgan, head of fixed income at Jupiter Asset Management, said: “As it stands, the market expects only two further cuts in the whole of 2025. This is perhaps not surprising given consumer spending, policy uncertainty (particularly around tariffs) and jobs looking in decent health.

“However, we think we are likely to see [US] rate cut expectations increase next year as growth softens. The labour market is clearly cooling, inflation is softening, and Europe and China are a drag on global growth.

“Given the high inflation of the Biden presidency was very unpopular with the public, we think Trump will be wary of overdoing inflationary policies, like tariffs. Together with potential government spending cuts in the US, next year could well see positive conditions for the performance of government bonds.”