A stagnant economy and loosening labour market give the Bank of England ample reason to cut interest rates again at its February meeting. Even with inflation set to stay above the central bank’s target over the course of this year, Bloomberg think the BOE will signal increased concern about the growth outlook.
Their base case is that rates end the year at 3.75%, reaching neutral — which they estimate at 3.5% — by early 2026. The risk is the BOE moves to that level more quickly. Markets are pricing three cuts this year.
What to Expect
The Monetary Policy Committee’s decision is scheduled for release Feb. 6 at 12 p.m. London time. Bloomberg expect the benchmark rate to fall to 4.5% from 4.75% currently. Bloomberg have pencilled in an 8-1 vote split with Catherine Mann favouring no change.
Markets see over a 90% chance of a 25-basis-point rate cut.
Bloomberg expect the MPC’s main message that easing is likely to be gradual — the central part of its guidance — to remain unchanged. But they think it could acknowledge that downside risks to both growth and the labour market have intensified. That would be a dovish shift and would open the door to rates ending the year below 3.75%.
The MPC’s new forecasts are also likely to suggest market pricing is more hawkish than its current baseline view. The interest rate path underpinning the central bank’s projection is likely to show the policy rate ending the year between 4% and 4.25% before settling at 4% in the medium term. That’s about 40 bps higher, on average, compared to the November forecast.
For 2025, Bloomberg expect a downward revision to the MPC’s GDP growth forecast to 1% from 1.5% previously, on the back of weaker data. The committee is also likely to nudge up its inflation forecast thanks to a combination of marginally higher energy prices and weaker sterling.
In the medium term, which is the horizon that matters for policy, Bloomberg think the higher path of rates will lead to downgrades to growth and inflation. For the latter, they expect the two- and three-year modal forecast to be 2% (2.2% in November) and 1.6% (1.8% in November), respectively.
Yields have fallen more recently with market pricing on Jan. 30 around 20 bps below the path the committee will likely use in its projection. Bloomberg suspect the MPC would still judge rates need to fall further and faster to prevent inflation from undershooting its 2% target.
