Bank of England to cut interest rates to 4.5% as economic growth stagnates

A CNBC report revealed that economists are betting on the Bank of England cutting rates by 25 basis points from 4.75% to 4.5% in the Thursday Monetary Policy Committee meeting. The expected rate cuts come as the UK economy continues to stagnate, with tax and wage hikes hitting businesses and U.S. President Donald Trump threatening to increase tariffs on global imports.

The report mentioned that 98% of economists believed that the Bank of England would cut rates on Thursday. Another Reuters poll also suggested that 90% of investors expected that the bank would cut rates in the upcoming meeting. Most traders have also changed their speculation of 2 rate cuts in 2025 to 3 cuts. Lloyd’s CEO, Charlie Nunn, supported the speculations, mentioning that the bank would cut rates thrice in line with the GBP interest rate swap markets.

UK inflation dropped from the forecasted 2.6% to 2.5% in December. Reports suggested that the drop in the inflation rate meant that prices were still rising but at a slower rate as the economy flatlined since December. Hargreaves Lansdown’s Susannah Streeter mentioned that the highlighted conditions ‘set the stage for rate cuts’ in the upcoming meeting. 

In August 2024, the UK central bank cut rates for the first time in four years, dropping bank borrowing rates from 5.25% to 5%. The BoE Governor, Andrew Bailey, commented after the decision, saying that the rate cut was ‘finely balanced’ and promising the bank would approach rate cuts with caution. Bailey further suggested that it was time for the country to put high inflation behind it. 

Bank of England holds rate cuts in December

Bank of England refuses to cut interest rates because inflation rising again. Downgrades growth outlook for the last three months of this year to zero, from previous prediction of 0.3 per cent.
Cost of ten-year borrowing for the Government at just over 4.5 per cent, over double…

— Andrew Neil (@afneil) December 20, 2024

The Bank of England’s expected rate cuts will be the first-rate cuts initiated since the committee’s decision to hold the cuts at its December meeting. The nine committee members made a near-unanimous decision, with 6 members choosing to hold the rate cuts and 3 choosing to cut rates by 25 basis points. The decision rivaled polls that expected only one member of the committee to vote for rate cuts in December.

The committee’s choice to hold on rate cuts resulted from a stagnating economy, with the country’s inflation hitting an 8-month high. The Bank of England mentioned that the inflation spike was higher than its previous forecast, adding that service inflation had also spiked. The bank also highlighted that its economic growth forecast was lower than its 0.3% November forecast. 

The split vote among the Monetary Policy Committee led to speculations that the Bank of England was divided. Ebury’s head of market strategy, Matthew Ryan, highlighted the doves’ focus on the stagnating economy and the hawks’ focus on a gradual approach to the rising inflation. 

Bank of England faces uncertainty ahead of expected rate cuts

Governor Bailey said the bank would still approach interest rate cuts gradually. The governor added that the BoE could not ‘commit’ to when the next rate cuts would be or by what percentage. Bailey further highlighted the growing uncertainty in the markets made it harder for the bank to outline how much it would cut rates in 2025. 

The bank is facing issues with President Trump’s expected tariff hikes, which several economists believed could hinder Bailey’s ability to cut rates or benefit the country. Economist Dan Boardman-Weston suggested that the tariffs could lead to more imports from China, significantly dropping the current consumer prices and affecting UK buyers. 

Another economist, Anthony Karaminas, still suggested that the current uncertainty could lead to economic stagnation and rising inflation. Karaminas suggested that the combination of the two possibilities could hinder the governor’s ability to cut rates. The economist further suggested that any rash decisions by the central bank would be more detrimental to the economy.

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