Overwhelming consensus that Bank of England will cut rates to 4.25% - and then maybe more
The Bank of England is widely expected to reduce interest rates this week, with policymakers likely to lower the base rate from 4.75% to 4.5%. This move would mark the third rate cut in six months as the central bank responds to a sluggish economy and slowing inflation.
A consensus among economists polled by Reuters suggests the Monetary Policy Committee (MPC) will vote overwhelmingly in favour of a 0.25 percentage point cut when it meets on Thursday, February 6. Analysts believe the decision is driven by weak economic growth and cooling inflation, both of which have heightened pressure on the Bank to make borrowing more affordable.
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Recent data from the Office for National Statistics showed that inflation eased unexpectedly to 2.5% in December, down from 2.6% the previous month. This figure contrasts with earlier forecasts that had projected inflation to either remain unchanged or rise slightly to 2.7%. The latest inflation reading is part of a steady decline from its peak of over 10% two years ago.
Meanwhile, UK economic growth has been sluggish in recent months. GDP figures reveal that the economy contracted by 0.1% in both September and October before posting a modest 0.1% growth in November. Given this stagnation, a reduction in borrowing costs is seen as a necessary step to stimulate economic activity.
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Financial markets have already priced in a rate cut, with investors predicting that this could be one of several reductions in 2025. Some analysts expect rates to fall to 4% by the end of the year, as the Bank of England continues loosening monetary policy after a prolonged period of high borrowing costs.
While a cut would provide relief to borrowers, some economists have warned that inflation could tick back up in the spring due to rising energy prices and household bills increasing in line with inflation.
The MPC’s rate decision will be announced at midday on Thursday, alongside updated economic forecasts from the Bank of England. These projections may include revised growth estimates for 2025, with some experts anticipating a downward adjustment from earlier predictions of 1.5% GDP growth.
Despite the expected rate cut, concerns remain about the long-term strength of the UK economy. Policymakers will have to strike a balance between stimulating growth and keeping inflation in check, ensuring that interest rates remain at an appropriate level for economic stability.
