LONDON – The Bank of England (BOE) has made a unanimous decision to cut interest rates to a 19-month low, with some officials advocating for a more aggressive reduction. The nine-member Monetary Policy Committee (MPC) lowered the benchmark rate by a quarter-point to 4.5%, marking the third rate cut since August.
However, the BOE expressed caution regarding future rate cuts, suggesting that only two more reductions would be necessary to bring inflation back to its 2% target. The central bank also warned that inflation could rise sharply later this year, peaking at 3.7%, and downgraded its growth forecast, indicating slower growth potential and a higher risk of overheating prices.
Market reactions to the rate cut were mixed. While the move was widely anticipated, the inclusion of two policymakers calling for a more significant reduction boosted expectations of further rate cuts. Money markets are now pricing in three more 25-basis-point cuts for the remainder of the year.
The announcement caused the pound to drop sharply, losing as much as 1.2% to US$1.2361, its worst performance among major currencies on February 6. Two-year gilt yields fell to 4.07%, reflecting market expectations of continued easing.
In response to the decision, Governor Andrew Bailey stated, “It will be welcome news to many that we have been able to cut interest rates again,” adding that the bank would monitor both domestic and global developments closely.
For Chancellor Rachel Reeves, the decision was a mixed blessing. While she welcomed the rate cut, she expressed concern about the overall economic outlook, stating that she was “still not satisfied with the growth rate.” The BOE had downgraded its estimate for UK growth capacity to just 0.75% this year, while projecting potential growth to return to 1.5% by 2026.
This outlook adds to the challenging environment for Ms. Reeves, whose leadership has been marked by a decline in economic growth since the Labour Party took power last July. The BOE now believes the UK economy contracted by 0.1% in the final quarter of 2024, and growth for the first quarter of 2025 is expected to be just 0.1%.