The Bank of England (BOE) is expected to cut interest rates on Thursday, amid a slowing economy, a looming business tax hike, and market uncertainty over US President Donald Trump’s tariff threats.
As of Wednesday, money markets had pegged the BOE’s rate cut at a 98% chance at its February meeting to 4.5%. The BOE had previously kept rates on hold at its December meeting, citing services inflation still high at 5% and headline inflation at 2.6% for November. However, inflation has since eased to 2.5%, while services inflation fell to a 33-month low of 4.4%.
Since January, traders have been raising their expectations for the number of rate cuts the BOE will make in 2025. While at the start of the year only two cuts were forecast, several leading economists and business figures, including Lloyds CEO Charlie Nunn, are now expecting three. The market is also now pricing in a cut of more than 80 basis points by December, hinting at the possibility of four rate cuts this year.
This expectation has been reinforced by a number of economic data surprises, including weaker-than-expected retail sales and disappointing November economic growth.
The main focus on Thursday will be the outcome of a vote by the nine-member Monetary Policy Committee (MPC). If the result is unanimous or near-unanimous, it will reflect the BOE’s inclination to ease monetary policy. In addition, the market will also be paying attention to the BOE’s latest growth and inflation forecasts.
The UK economy entered a recession in the third quarter of 2023, and the BOE has forecast zero growth in the last three months of the year.
If the BOE were to lower its growth forecast for 2025 or revise down its inflation forecast from 2.7% in the fourth quarter of 2025 before easing to 2.2% in 2026, it would strengthen the case for further rate cuts.
Two major developments could impact the BOE and Governor Andrew Bailey's economic forecast: the impact of UK fiscal reforms and Trump's tariff threats.
According to Dan Boardman-Weston, CEO and Chief Investment Officer of BRI Wealth Management, if Chinese goods enter Europe and the UK at lower prices, it could put downward pressure on inflation, giving the BOE and the European Central Bank (ECB) more room to cut interest rates more aggressively than market expectations.
The development is also likely to deepen the monetary policy divergence between the BOE, the ECB, which is expected to cut rates by 1% this year, and the US Federal Reserve, which is expected to cut rates by only 0.5% at the maximum rate.
