The Bank of England is set to announce its first interest rate decision for 2025 on February 6 at the conclusion of the Monetary Policy Committee meeting, where investors anticipate the first rate cut of the year. Below is an overview of the expected decision from the Bank of England and its implications for markets, investors, and the possible scenarios for the decision.
Expected Interest Rate Cut Markets are betting on a 25 basis point cut in interest rates by the Bank of England, bringing the base rate down from its current level of 4.75% to 4.5%, after UK inflation data for December came in lower than expected, increasing expectations for an anticipated rate cut, especially amid mounting pressure on the Bank of England to intervene and prevent a stagnant economy.
Recent data showed a significant slowdown in inflation from its peak, with the annual inflation rate dropping from 2.6% to 2.5%, which surprised analysts who had expected inflation to remain steady or rise slightly. This provides the Bank of England with room to ease monetary policy, particularly as wage growth pressures in the UK have also eased.
The Office for Budget Responsibility at the UK Treasury expects average inflation to be 2.6% in 2025 and to decline further in the coming years. However, external shocks and changes in government policy may impact these forecasts, with the latest report from the Office for Budget Responsibility due in March likely providing further clarity on this matter.
Economists surveyed by Reuters unanimously expect the Bank of England to reduce interest rates at this meeting, especially as the slowing UK economy—having registered only 0.1% GDP growth in November—has intensified calls for the Bank to ease monetary restrictions and lower borrowing costs.
Divided Opinions on the Monetary Policy Committee Expectations for a wide-ranging rate cut come at a time when opinions within the Bank of England’s Monetary Policy Committee are divided over the pace of monetary easing. Some members advocate for significant rate cuts, while others, like Deputy Governor Sarah Breeden, prefer a more cautious approach.
Markets Await Updated Economic Forecasts The Bank of England’s quarterly monetary policy report, which will be released during the February meeting, is expected to offer updated economic forecasts that justify a rate cut, particularly as previous forecasts painted a bleak picture for growth in the UK, where high-interest rates have stifled economic activity. Any downward revisions to growth forecasts are likely to strengthen the case for continued monetary easing.
Possible Scenarios for the Bank of England's Decision As the Bank of England's interest rate decision approaches on Thursday, investors should be prepared for several potential scenarios that could yield different outcomes. The expected scenarios for the Bank of England’s decision in February can be summarized as follows:
Scenario One: The baseline scenario where the Bank of England cuts interest rates by 25 basis points while hinting at further gradual cuts throughout 2025.
Scenario Two: The less likely aggressive cut, where the Bank of England reduces interest rates by 50 basis points to alleviate restrictions on economic growth, which is facing strong pressures pushing it toward the brink of recession.
Scenario Three: A 25 basis point cut accompanied by pessimistic outlooks, where the Bank of England may indicate faster-than-expected cuts for the remainder of the year.
Scenario Four: The most hawkish scenario with lower odds, where the Bank of England keeps interest rates unchanged.
