Bank of England Expected to Cut Rates Amidst Economic Stagnation
The Bank of England (BoE) is widely anticipated to reduce interest rates during its upcoming meeting on February 6th. The decision is driven by a stagnant economy and softening inflation data.
Economists unanimously predict a quarter-point cut, bringing the benchmark rate from 4.75% to 4.5%. Investors also estimate a 90% probability of a rate reduction.
Since the BoE's last projections in November, economic growth has faltered. Additionally, core inflation measures have declined, although wage growth has unexpectedly accelerated.
Policymakers will scrutinize any shifts in the Monetary Policy Committee (MPC) members' views, as the economic outlook remains uncertain. In December, six members voted to maintain rates, while three favored a cut.
The MPC may also provide guidance on how employers will respond to the government's recent payroll tax hike, which could impact the inflation outlook.
Financial markets have priced in nearly three quarter-point rate cuts this year, a significant increase from early January. The shift in U.S. rate expectations and concerns over government finances have contributed to this sentiment.
A dovish stance from the BoE could support the business community and investor confidence. However, market expectations for rate cuts may be too cautious for MPC members. Some anticipate a stronger focus on economic weakness and the deteriorating euro zone outlook.
Recent comments from MPC members have hinted at potential rate cuts. Alan Taylor, an external member, suggested four reductions in 2025. Deputy Governor Sarah Breeden emphasized the gradual pace of cuts.
Weak economic growth may limit companies' ability to pass on tax hikes to consumers. This could allow the BoE to look beyond near-term inflation pressures and implement more rate cuts than currently priced in.