How fast will the Bank of England cut interest rates in 2025?
The pace at which the Bank of England cuts interest rates in 2025 will be a major focus for financial markets in 2025, just like it was in 2024.
The Bank cut interest rates just twice this year, meaning the Bank Rate will stand at 4.75 per cent as the new year begins. After the latest batch of data in December, financial markets expect a similarly gradual pace of easing in 2025.
Official figures, which were released in the week before Christmas, showed that inflation rose to 2.6 per cent in November, in line with expectations but confirmation that inflation remains sticky.
Wage growth increased much faster than markets had expected, suggesting price pressures will persist for a while yet.
It was no surprise, then, that the Bank opted to hold rates in December.
Bank of England guidance
There was little change in the Bank’s guidance either. Policymakers committed to a ‘gradual’ pace of rate cuts, citing numerous uncertainties to the economic outlook.
The vote split, however, did surprise markets. Three members of the nine-strong Monetary Policy Committee (MPC) voted for another cut, primarily due to the UK’s sluggish recent performance.
GDP figures showed that the economy shrunk by 0.1 per cent in October, the second successive month of contraction. The Bank of England expects the economy to stagnate in the final quarter of 2024.
Indeed, growth has been negligible at best since the summer and the Budget has not made life much easier for firms. The MPC said that the impact from the increase in National Insurance Contributions was “weighing heavily on sentiment”.
Growth dominates
Looking into the new year, most economists suggested that policymakers would be more swayed by the prospect of sluggish growth than stubborn inflationary pressures.
“Although the UK economy is facing significant wage pressures, economic activity is significantly less dynamic than in the US,” Guillaume Derrien, senior eurozone economist at BNP Paribas said.
“Between an ECB whose rate cuts will, admittedly, be gradual but steady, and a US Federal Reserve that is now more hawkish, the Bank of England will be in an intermediate position in 2025, with four rate cuts expected in 2025…at a rate of one cut per quarter,” Derrien added.
Ruth Gregory, deputy chief UK economist at Capital Economics, agreed. “We haven’t changed our view that the Bank will continue to cut rates by 25bps a quarter,” she said.
Why are policymakers more concerned by slow growth than hints of high inflation? November’s increase in inflation was forecast long ago – it was mainly due to base effects – while the MPC noted that monthly pay figures can be “volatile”.
Sticky inflation could still prove to be a headache for the Bank, but at this stage, sluggish growth seems to be the overriding concern. Stagnation has already appeared in the official statistics.
There is, of course, one other uncertainty which hangs over the MPC: Donald Trump.
Donald Trump’s impact on interest rates
Nobody is quite sure how Trump’s tariffs will impact the global economy, partly because the details of the tariffs are unclear.
At its last meeting, the MPC clearly wanted to flag that Trump is likely to have a significant impact on trade policy, but did not want to estimate any potential impact.
“Indicators of trade policy uncertainty had increased materially, but that the magnitude and the direction of the impact of any such policies on UK inflation was at present unclear. These effects might not be apparent for some time,” the Bank said.
Despite the MPC’s understandable reluctance to speculate, two members of the body have already suggested that Trump’s tariffs might actually contribute to lower inflationary pressures.
Swati Dhingra and Clare Lombardelli have both argued that large tariffs on imports from China would incentivise Chinese producers to cut prices in an attempt to preserve market share.