Bank of England Cuts Rates to 19-Month Low, Signals End of Easing Cycle

London, United Kingdom - The Bank of England's Monetary Policy Committee (MPC) voted to lower interest rates to 4.5%, the lowest level since June 2023. This brings the benchmark rate to a 19-month low.

However, the MPC struck a cautious tone, hinting that only two more rate cuts are anticipated to tame inflation, currently at 2.8%, and bring it to the target of 2%.

MPC Hawkishness

The MPC expressed concern that inflation will rise to 3.7% later this year, prompting a more hawkish stance. The latest estimates show a downgrade in economic growth prospects and a reduction in the economy's growth capacity.

Governor Andrew Bailey emphasized the gradual and cautious approach to further interest rate cuts, citing uncertainties surrounding both demand and supply in the economy.

Unexpected MPC Vote

Seven of the nine MPC members voted for a 25-basis-point rate cut, while two external policymakers favored a 50-basis-point reduction. This was the first vote for a rate cut by Catherine Mann, who advocates an "activist" approach.

Market Reaction

Traders initially focused on the calls for a larger 50-basis-point cut, leading to speculation of further interest rate reductions despite the MPC's more hawkish tone. However, money markets now expect three additional 25-basis-point cuts this year.

The pound weakened against the US dollar, dropping by 1.2% to $1.2361, while gilt yields declined across the curve.

Updated Economic Outlook

The MPC's updated forecasts in the Monetary Policy Report present a slightly more hawkish outlook. The market-implied path for interest rates indicates only two further cuts in the next three years, with rates stabilizing at 4%.

Inflation is projected to return to the target in the fourth quarter of 2027, requiring a tighter monetary policy stance than the four cuts to 3.75% signaled by the BOE in November.

Reeves' Challenges

The economic outlook poses significant challenges for Chancellor of the Exchequer Rachel Reeves, who has overseen a decline in growth since Labour's election victory last July.

The BOE predicts a 0.1% economic contraction in the three months to December and a modest 0.1% growth in the first quarter of 2025. Reeves' tax hike budget, announced on October 30th, has further dampened the short-term outlook.

The BOE's forecast is not contingent on changes in global tariffs, but a trade war could potentially suppress UK growth by deterring investment and hiring decisions.