The Bank of England (BoE) is expected to lower interest rates in its upcoming meeting on Thursday, reducing the base rate from 4.75% to 4.5%. This follows lower-than-anticipated inflation figures for December but continued worries about sluggish economic growth.
Market expectations indicate a 97% probability of a rate cut, marking the third reduction in borrowing costs since the peak of 5.25% in August 2023.
Susannah Streeter, head of money and markets at a leading financial firm, commented: “The stage is set for a rate cut, with December’s inflation dip and the stagnating economy taking centre stage. With three policymakers previously supporting a rate cut, it is highly likely that more will follow suit in the upcoming decision.”
Despite the strong likelihood of a cut, some financial analysts have warned that the BoE’s ability to continue lowering borrowing costs could be limited due to persistent inflationary pressures. The central bank is set to release its latest forecasts alongside its rate decision.
Matthew Ryan, head of market strategy at a financial services firm, stated: “We anticipate the Monetary Policy Committee (MPC) will increase its short-term inflation forecast while revising its long-term outlook downward. This could spark market concerns about potential stagflation, which would be a significant challenge for the government’s economic strategy.”
He added: “A 25-basis-point rate cut on Thursday appears likely, with a split decision expected—potentially a 7-2 or 8-1 vote.”
Laith Khalaf, head of investment analysis at a major investment firm, noted: “This will be the first interest rate decision of 2025, and it looks set to start the year with a cut. Economic indicators have been weak, and services inflation has notably declined since the last MPC meeting in December, when three members already supported a cut to 4.5%.”
Daniela Sabin Hathorn, senior market analyst at a trading platform, said markets are nearly certain of a rate cut, although inflation concerns persist. “Current pricing suggests a 97% probability of a 25-basis-point reduction, marking the third cut since the easing cycle began last year.”
She added: “Inflation remains a key issue, particularly regarding wage growth. However, recent economic data has eased concerns of runaway inflation. Both headline and core consumer price indexes fell more than expected in December, alongside weaker retail sales and industrial production figures.”
While inflation has dropped significantly from its peak above 11% in mid-2022—largely due to energy price surges following geopolitical events—it remains above the BoE’s 2% target. Analysts predict it could exceed 3% in the coming months.
Michael Field, European market strategist at a financial research firm, said: “The probability of a cut on 6 February is high, largely driven by recent inflation data. However, these inflation movements are relatively minor. With UK interest rates still at 4.75%, they remain excessively high considering how far inflation has already fallen.”
Services inflation, closely monitored by the BoE as an indicator of underlying price pressures, declined to 4.4% in December from 5% in the previous month. Analysts at a major bank expect Catherine Mann, a known “hawk” on the MPC, to be the only member to oppose a rate cut.
Sanjay Raja, chief UK economist at the bank, commented: “A quarter-point rate cut to 4.5% remains our base case. Given slowing growth, rising unemployment, and services inflation falling below the BoE’s forecasts, a February cut appears increasingly likely.”
He added: “We expect an 8-1 vote for a rate cut, with Catherine Mann as the sole dissenter.”
Analysts at another financial firm suggest that the BoE’s dovish members will have a stronger case for a cut than they did in December. Meanwhile, government policy changes, including increases in employer national insurance contributions and the national minimum wage, have heightened concerns about rising labour costs.
Chancellor Rachel Reeves’ recent budget has also raised concerns about growth, with reports indicating that the Office for Budget Responsibility (OBR) may revise down its economic growth forecast. Andrew Goodwin, chief UK economist at a research firm, stated: “The OBR’s current forecast of 2% growth this year appears unrealistic unless there are significant historical revisions. Achieving 2% would require quarterly growth averaging 0.75%, a level rarely reached in recent years.”
Pantheon Macroeconomics recently downgraded its 2025 growth projection to 1.1% from 1.3%, while EY reduced its forecast to 1% from 1.5%.
How Many Rate Cuts Could Occur in 2025?
While a February rate cut is almost certain, uncertainty remains about further reductions. Markets currently anticipate two or three additional cuts this year, bringing the base rate down to 4%. However, some financial institutions have a more aggressive outlook, predicting up to five cuts in 2025, which could lower rates to 3.5%.
A leading investment bank stated: “We expect a February cut, with rates falling to 3.5% by year-end. Cuts are anticipated in February, May, June, August, and November.”
Another global financial firm shares a similarly dovish stance, forecasting rates to drop to 3.25% by mid-2025. “A cut on 6 February is very likely and already priced into financial markets. However, we believe markets are underestimating the extent of future cuts, relative to our projection of 3.25% by Q2 2026.”
Impact on Mortgages and Savings
A rate cut by the BoE would affect millions of households across the UK, particularly those with mortgages, credit cards, and savings accounts. Government data indicates that nearly one-third of UK households have a mortgage, with around 600,000 homeowners on tracker mortgages directly linked to the BoE’s base rate. For these individuals, a rate cut would lead to immediate reductions in monthly repayments.
Experts note that those on fixed-rate mortgages will not see immediate effects, as current market conditions have already factored in expected rate cuts. Meanwhile, savings accounts may see reduced returns, particularly for easy-access accounts.
Mark Hicks, head of savings at a financial firm, explained: “With a rate cut widely expected, many reductions have already been priced into savings products. However, competition in the cash ISA market remains strong, with several providers still offering rates around 5%.”
Global Monetary Policy Trends
Elsewhere, the US Federal Reserve has held interest rates steady between 4.25%-4.50%, following three consecutive rate cuts since September. In Europe, the European Central Bank (ECB) has reduced interest rates by a quarter-point to 2.75%, continuing its easing cycle in response to economic conditions.
The Bank of England will announce its official decision on Thursday at noon.
Stay tuned for the latest updates on the Bank of England’s interest rate decision and its potential impact on the UK economy, brought to you by London Pulse News.
