Bank of England cuts rates while signalling caution on path ahead

LONDON – Bank of England (BOE) officials unanimously decided to cut interest rates to a 19-month low, with two officials supporting a bumper 50-basis-point cut, prompting markets to boost bets on further easing.

The nine-member Monetary Policy Committee (MPC) lowered the bank’s benchmark rate by a quarter point to 4.5 per cent, the third such reduction since August 2024. 

Still, the MPC signalled caution about the outlook for rates, suggesting that only two more reductions were needed to bring inflation back to the bank’s 2 per cent target.

Policymakers also dealt a blow to Chancellor of the Exchequer Rachel Reeves, warning that inflation would rise “quite sharply” to peak at 3.7 per cent later in 2025, as it downgraded growth and its estimate of how quickly the economy could grow without overheating prices.

“Today’s cut from the Bank of England was broadly expected, though the accompanying statement contained some mixed signals,” said J.P. Morgan Private Bank global market strategist Matthew Landon. “At the margin, we interpret this is a green light for the market to price a lower terminal rate.” 

Traders initially focused on the calls from two policymakers for a sharper reduction, adding to bets on future interest rate cuts. Money markets are now favouring three more 25-basis-point reductions in 2025.

That hurt the pound, which extended declines versus the dollar dropping as much as 1.2 per cent to US$1.2361. It was the worst performer among major currencies on Feb 6. Two-year gilt yields fell as much as seven basis points to 4.07 per cent.

“It will be welcome news to many that we have been able to cut interest rates again,” Governor Andrew Bailey said in a statement. “We’ll be monitoring the UK economy and global developments very closely and taking a gradual and careful approach to reducing rates further.” 

The MPC decision to lower its benchmark rate to the lowest level since June 2023 represents a reprieve for the more than half a million home owners coming off five-year fixed mortgage deals in 2025.

Ms Reeves called the decision “welcome news”, but expressed disappointment with the broader outlook provided by the bank, saying she was “still not satisfied with the growth rate”.

The bank downgraded its estimate of Britain’s growth capacity, which makes faster growth inflationary. It halved its estimate to 0.75 per cent for 2025, but expects potential growth to return to 1.5 per cent from 2026.

The bank’s outlook is a bleak backdrop for Ms Reeves, who has presided over a collapse in growth since Labour won the general election last July.

The BOE believes the economy contracted 0.1 per cent in the three months to December 2024, the quarter that included Ms Reeves’ tax-raising budget on Oct 30, and will grow just 0.1 per cent in the first quarter of 2025. BLOOMBERG