Bank of England Set to Cut Interest Rates Amid Economic Struggles.
Quarter-point rate cut expected despite rising short-term inflation pressures.
The Bank of England (BoE) is expected to lower interest rates by another quarter-point this week, marking a third reduction in just over six months. Financial markets anticipate the BoE’s Monetary Policy Committee (MPC) will cut its official rate to 4.5%, driven by signs of a weakening UK economy and a potential short-term rise in inflation.
Policymakers are facing a challenging environment, with the prospect of resurging inflation amid a global trade war, following US President Donald Trump’s tariffs on Canada, Mexico, and China. Business confidence in the UK has also dropped, and surveys point to an increase in corporate redundancies. Reports suggest that the UK economy likely failed to grow in the last quarter of 2024.
Jari Stehn, chief European economist at Goldman Sachs, said, “We think that the weakness in the recent growth data, deterioration in labour market indicators and gradual progress with underlying services inflation will mean that there is widespread support for a [quarter-point] cut.”
Financial markets are pricing in three total rate reductions this year, with an 8-1 vote in favour of a rate cut at the MPC meeting. Catherine Mann is expected to be the lone dissenter.
While consumer prices rose by 2.5% annually in December, close to the official 2% target, services inflation has slowed to 4.4%. However, higher energy prices may push inflation up in the coming months. Economists predict that the BoE could forecast CPI growth of 3% in the second quarter of 2025.
Alongside rising labour costs due to a national insurance increase and a higher national minimum wage, the BoE faces a tough balancing act in managing both inflation and stagnating growth.
