Bank of England Set to Cut Rates Amid Economic Slowdown
The Bank of England (BoE) is widely expected to reduce interest rates next week, potentially signaling a more aggressive easing cycle than previously anticipated.
Economists unanimously predict a 0.25% cut to 4.5% on February 6, while investors assign a 90% probability to such a move.
Since the BoE's November projections, the economy has exhibited signs of stagnation and inflation measures have declined. However, wage growth has shown unexpected acceleration.
Investors will closely monitor any revisions to the BoE's economic and inflation forecasts, particularly regarding the impact of recent government budget measures on labor costs.
Financial markets now price in approximately three quarter-point rate cuts for 2025, up from two earlier this year.
US Rate Expectations Impact
The anticipation of interest rate changes in the United States has contributed to a sell-off in UK government bonds, increasing borrowing costs.
Chancellor Rachel Reeves has expressed a preference for a dovish stance from the BoE to mitigate the impact on fiscal targets.
MPC Members Lean Toward Lower Rates
Public comments from Monetary Policy Committee (MPC) members have hinted at a preference for lower interest rates.
External member Alan Taylor advocates for four rate cuts in 2025, while Deputy Governor Sarah Breeden emphasizes gradual reductions.
Economic Considerations
MPC members may view current financial conditions as too restrictive, indicating a need for further easing.
Weak economic growth may make it difficult for companies to pass on payroll tax hikes to consumers, enabling the BoE to justify additional rate cuts despite near-term inflationary pressures.
Impact on Markets
A dovish statement from the BoE could support the pound sterling in the short term and provide reassurance to investors and businesses.
Business surveys suggest that workers will likely bear the burden of tax increases through slower wage growth, potentially reducing inflation pressures.