Bank of England officials on Thursday, February 6, decided to cut interest rates to a 19-month low.
On Thursday, the nine-member Monetary Policy Committee lowered the bank’s benchmark rate by a quarter of a point. After the implementation of this decision, the mentioned indicator is 4.5%. This interest rates cut is the third since August in the United Kingdom. It is also worth noting that two Bank of England officials supported a larger lowering of borrowing costs. In this case, it implies a decrease in the corresponding indicator by 50 basis points. Against the background of the mentioned information, markets boost bets expecting that the financial regulator of the United Kingdom will continue to ease monetary policy.
The larger lowering of borrowing costs was supported by Swati Dhingra and Catherine Mann. These policymakers during the discussion of the vector of further dynamic of monetary policy of the central bank of the United Kingdom demonstrated the most hawkish position. At the same time, the Governor of the Bank of England, Andrew Bailey, and other officials supported more moderate actions within the framework of lowering the cost of borrowing.
The Monetary Policy Committee has signaled a gradual and careful approach to further interest rate cuts. The forecasts of this committee suggest that two more lowering of the cost of borrowing are needed to achieve the 2% inflation target.
The policymakers also, in a sense, made a hint addressed to the Chancellor of the Exchequer Rachel Reeves. In this case, it implies a warning that inflation will show a sharp increase and reach a peak of 3.7% by the end of the current year. It is worth noting that the November projection stipulated that the mentioned figure would be 2.8%. The Bank of England also downgraded its economic growth forecast.
Andrew Bailey, while talking to reporters after the decision to lower the cost of borrowing was made, stated that some domestic inflationary pressures persist. Also, in the relevant context, he noted that, perhaps, the mentioned pressure was easing a little slower than the pace envisaged by the expectations formed last year. According to the head of the Bank of England, the specified state of affairs indicates the importance of a gradual approach to the withdrawal of restrictive monetary policy.
It is worth noting that traders generally focused on the calls of the two policymakers for a more drastic lowering of the cost of borrowing. For them, the relevant statements signaled a significant increase in the likelihood of continued interest rate cuts. Currently, the expectation is scaling up in the money markets that the Bank of England will make three more decisions on lowering borrowing costs in the present year. In this case, it is assumed that each of the mentioned decisions will involve cutting interest rates by 25 basis points.
Meanwhile, the pound continues its movement across a downward trajectory against the dollar. The currency of the United Kingdom fell by 1.2% to $1.2361. On Thursday, the pound showed the worst result among the major currencies. The yield on two-year gilt demonstrated a decrease of as much as seven basis points. Currently, the corresponding figure is 4.07%.
Matthew Landon, global market strategist at JPMorgan Private Bank, said that in terms of margins, Thursday’s decision by the financial regulator gives the market the green light to price a lower terminal rate. The expert also noted that the interest rates cut by the Bank of England was generally expected, although the accompanying statement contained some mixed signals.
The Monetary Policy Committee’s decision to reduce its benchmark rate to its lowest level since June 2023 represents a reprieve for more than half a million homeowners who coming off five-year fixed-rate mortgage deals this year.
Rachel Reeves called Thursday’s decision by the Bank of England to cut interest rates welcome news. At the same time, she expressed disappointment with the broader outlook provided by the financial regulator of the United Kingdom. Rachel Reeves is still not satisfied with the rate of economic growth.
The markets took Thursday’s decision by the Bank of England as a kind of symbolic dovish signal. Through the prism of the same paradigm of perception, markets estimate the statements of the financial regulator of the United Kingdom regarding monetary policy. At the same time, not everyone agrees with this point of view. For example, economists Ana Andrade and Dan Hanson noted that the current officially declared position of the financial regulator of the United Kingdom is not dovish to the extent that they expected. According to them, the recent weakness of the UK economic system and the labor market does not appear to have significantly changed the Bank of England’s assessment of risks around inflation.
Andrew Bailey said that the mention of caution in the United Kingdom’s financial regulator core guidance on further monetary policy easing reflected questions about the global economy. In the relevant context, he noted that there is a high level of uncertainty in the world, and there will be bumps in the road ahead. The mentioned uncertainty is largely related to the currently observed tendency of rising geopolitical tensions. Also, in the relevant context, a sensitive impact factor is the tightening of the United States trade policy, implying tariffs on imported goods. The relevant measures have already been partially implemented, but so far they have not affected the European Union and the United Kingdom. However, London and Brussels are likely to face a tightening of Washington’s trade policy as part of their economic activities.
The vote split observed on Thursday in the Monetary Policy Committee could be read as dovish. At the same time, economists had expected an 8-1 split. The market path for rates used to build the forecast has just two further cuts over the next three years, with policy settling at 4%. Under the relevant scenario, one interest rates cutting to 4.25% is envisaged in 2025. Also, in this case, inflation is expected to return to the target of 2% in the fourth quarter of 2027. The corresponding scenario also means that the monetary policy of the financial regulator of the United Kingdom should be much tougher than the four lowering of borrowing costs in the current year to 3.75%, which, according to media reports, Andrew Bailey probably endorsed in December.
The actions of the Bank of England will depend on the economic reality in the UK. The one of main components of the mentioned reality is currently higher-than-expected inflation related to energy and water bills and regulated prices such as bus fares.
Rob Wood, chief UK economist for Pantheon Macroeconomics, said he placed more weight on the Bank of England’s hawkish inflation forecasts, a relatively strong pay settlements survey, and its overall guidance than the votes of two outliers.
It is worth noting that Andrew Bailey, at the level of his official rhetoric, does not demonstrate commitment to the view that the financial regulator of the United Kingdom will make decisions on intensive monetary policy easing, and this path will be sustainable and without any obstacles. Mr. Bailey stated that he would not overinterpret any changes in the voting patterns. Also, in the relevant context, he separately noted that it is important that the view on the future path of interest rates be based on fundamental economic indicators.
Moreover, the Bank of England has downgraded the estimate of the United Kingdom’s growth capacity. The corresponding estimate was halved to 0.75%. At the same time, the United Kingdom’s financial regulator expects potential growth to return to 1.5% from 2026. The Bank of England noted that the mentioned downgrade is due to persistently low labor productivity. Moreover, the United Kingdom’s financial regulator has suggested that Labor’s increased spending on the National Health Service could worsen the situation.
The outlook announced by the Bank of England provides a gloomy backdrop for Rachel Reeves, which has already faced a collapse in economic growth since Labour’s victory in the general election last July. The financial regulator of the United Kingdom believes that the country’s gross domestic product (GDP) contracted by 0.1% in the fourth quarter of the past year. It is worth noting that the mentioned three-month period began after Rachel Reeves increased the tax budget. The Bank of England also expects the United Kingdom’s economic system to show minimal growth of 0.1% in the first quarter of the current year.
The UK financial regulator predicts that the country’s GDP will increase by 0.75% for the whole of 2025. It is worth noting that this forecast of the financial institution has decreased by half compared to the initial expectations regarding the dynamic of the economy in the current year. At the same time, the Bank of England predicts that the United Kingdom’s GDP growth rate will accelerate in 2026 and 2027. The UK financial regulator expects the country’s economy to grow by 1.5% in each of the specified years. It is worth noting that the previous version of the mentioned forecast provided that the corresponding indicator would increase by 1.25%. This projection covers both 2026 and 2027.
The financial regulator of the United Kingdom clarified that its forecast does not depend on any changes in global tariffs. At the same time, the Bank of England noted that a potential trade war could be a factor in slowing UK economic growth by delaying investment spending and hiring decisions.
Rachel Reeves’ budget tax rises, including a 26 billion pound ($32 billion) increase in employers’ National Insurance Contributions, have a negative impact on the short-term outlook. There is also currently a pessimistic business sentiment in the United Kingdom. The Bank of England warned that if this situation persists, economic growth may show totals that are worse than the readings provided by forecasts.
It is worth noting that the financial regulator of the United Kingdom has not made significant changes to its projection for the dynamic of GDP after Rachel Reeves announced plans to boost economic growth. In this case, measures such as relaxing regulations and implementing infrastructure projects are implied.
Luke Bartholomew, deputy chief Economist at Abrdn, said that it is difficult to see that the Bank of England will significantly accelerate the pace of monetary policy easing until it sees how the economy will react to the spring increase in National Insurance. The expert also noted that the signals recorded on Thursday from the financial regulator of the United Kingdom indicate that there is scope for several more interest rates cuts in the current year, given the weak prospects for economic growth. Luke Bartholomew expects UK borrowing costs to be below 3% over the next two years.
It is obvious that the economy of the United Kingdom is currently moving along a path consisting of various obstacles and some barriers. Achieving the goal of sustainable growth will be a difficult process.
As we have reported earlier, Fed Holds Interest Rates Steady.
