The Bank of England is expected to cut interest rates this Thursday in a bid to stimulate a sluggish UK economy, despite mounting fears over inflation creeping back up.
Markets are bracing for a quarter-point reduction, bringing the base rate down to 4.5% – the lowest level in 18 months.
The cut should feed through relatively quickly to the 1.5 million homebuyers with mortgages that track the Bank of England base rate, giving these individuals a noticeable boost.
However, it is likely to take some time for rates on home loans to first time buyers and others to come down.
A reduction in the base rate this week would mark the third rate cut in just over six months as the Bank’s Monetary Policy Committee (MPC) attempts to navigate a delicate balancing act: boosting faltering economic growth while keeping inflation in check.
Markets are bracing for a quarter-point reduction (Image: Getty)
On one hand, UK economic growth has stalled, with business confidence plummeting and corporate redundancies on the rise. However, on the other hand, inflation, which had been cooling, is at risk of rebounding.
The latest figures show consumer prices rose by 2.5% in December, inching closer to the Bank’s 2% target but still higher than expected.
Adding to the complexity, rising energy costs and a decision by the Chancellor Rachel Reeves to hike employer National Insurance contributions and the National Living Wage could push inflation up again in the coming months.
Analysts now expect annual CPI inflation to hit 3% or higher in the second quarter of 2025—well above earlier forecasts.
Financial markets are pricing in multiple rate cuts this year, with some analysts expecting at least three reductions in total.
A decisive 8-1 vote in favour of a rate cut is widely expected, with only MPC hawk Catherine Mann likely to dissent.
Jari Stehn, chief European economist at Goldman Sachs, said: “The weakness in recent growth data, deterioration in labour market indicators, and gradual progress on services inflation mean that there is widespread support for a cut.”
Matt Swannell, a chief economic advisor to the EY Item Club, said a quarter point cut is “highly likely” at the February meeting but highlighted an ongoing challenge for the Bank.
He said: “That does not take away from the longer term dilemma facing the Bank of England, as its latest set of projections are likely to show that upcoming growth will be weaker, but near-term inflation will be higher than when it met three months ago.”
Others warn that the Bank may be forced to slow its rate-cutting spree if inflation picks up again. “There is a dreaded trade-off between supporting growth and managing inflation risks,” cautioned Thomas Pugh, an economist at RSM.
Monica George Michail, an associate economist at the National Institute of Economic and Social Research (NIESR), warned of continued uncertainty in the months to come.
She explained: “Annual CPI inflation slightly fell to 2.5% in December 2024 but is forecasted to record a rise in January due to base effects from last year before slowing again.”
The NIESR suggests the the central bank will remain cautious in its approach to rate cuts throughout 2025. Rates may “remain higher for longer” amid heightened global uncertainty and inflation expectations.
The Bank’s decision comes as other major central banks have also started to ease monetary policy.
The European Central Bank cut its benchmark rate to 2.75% last week, while the Bank of Canada slashed its key rate to 3.25%.
In contrast, the US Federal Reserve has held firm, keeping rates at 4.25-4.50% as the American economy outpaces its G7 peers.
With growth stagnating and inflation uncertainty looming, all eyes will be on Governor Andrew Bailey and the MPC’s next move. One thing is clear: the Bank of England is walking a tightrope, and any misstep could have serious consequences for holders, businesses, and the broader economy.