Bailey: expect to keep cutting rates further thanks to disinflation
Bank of England governor Andrew Bailey begins today’s press conference by confirming that Bank rate has been cut to 4.5%.
He says this will be “welcome news to many”, adding that the monetary policy committee expects to be able to cut rates further as “the disinflation process” continues.
But, he adds:
We will have to judge, meeting by meeting, how far and how fast.
The road ahead will have “bumps on it”, Bailey adds, pointing out that we live in an uncertain world.
He flags the Bank’s forecast that inflation will rise to 3.7% this year (see earlier post), before dipping back.
Depite that forecast, the Bank sees signs that underlying inflation is easing (allowing today’s rate cut).
Key events
Closing post
Time to wrap up….
The Bank of England has cut interest rates to 4.5%, as it halved its UK growth forecasts for the year and warned households would face renewed pressure from rising prices.
With the government under fire over the sluggish economy, the Bank’s monetary policy committee (MPC) voted by a majority of seven to two to reduce its key base rate, down from 4.75%, to provide some financial relief to borrowers.
It also sounded the alarm for the year ahead, downgrading its 2025 growth forecasts made in November from 1.5% to 0.75% and warning that inflation would reach a fresh peak of 3.7% by the autumn – almost twice the 2% target set by the government.
However, Andrew Bailey signalled Threadneedle Street stood ready to cut borrowing costs further this year despite the short-term rise in inflation, amid concerns over the weak economy.
He said:
“There will be a bump in the road [from inflation] but we don’t think that bump is going to have a lasting effect.”
He added that the Bank would take a “gradual and careful approach to reducing rates further.”
Sterling fell against the US dollar as investors bet on a deeper round of interest rate cuts, having been taken by surprise that two MPC members had pushed for a larger half-point reduction, including Catherine Mann, previously a leading hawk….
More here:
Bailey told reporters that the monetary policy committee expects to be able to cut rates further as “the disinflation process” continues.
In other reaction…
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The pound has dropped by three-quarters of a cent against the US dollar tonight, to $1.243.
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This helped drive the FTSE 100 share index up to a new alltime high.
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The money markets now predict the Bank will cut interest rates twice or three more times this year – with cuts in May and August priced in.
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Some economists, though, questioned whether the Bank’s decision was quite as dovish as the City reaction implies.
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Others warned that the sharp cuts to UK growth forecasts were bad news for Rachel Reeves ahead of next month’s Spring Statement.
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The chancellor said she “wasn’t satisfied” with the UK growth rate…
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…while the Liberal Democrats called the weak growth forecast ‘putrid’…
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…and prime minister Sir Keir Starmer said the rate cut would put more money in people’s pockets.
Here’s our analysis of the situation:
Goodnight. GW
Analysis: Unambiguously bleak Bank of England forecasts pave way for spending cuts
Heather Stewart
With the public finances tight and Rachel Reeves having pledged to balance the books, interest rate cuts are one of the few levers that could boost the UK’s economic growth in the short term, and the chancellor will be glad of the Bank of England’s quarter-point reduction on Thursday – and the clear signal that it is now in cutting mode.
Seven of the monetary policy committee’s (MPC) nine members backed the quarter-point drop, taking the Bank’s policy rate to 4.5%, while two wanted to be more “activist”, proposing a half-point cut. The Bank of England’s governor, Andrew Bailey, said the MPC would be “taking a gradual and careful approach to reducing rates further”.
Lower borrowing costs should feed through fairly rapidly to firms and households, compared with the impact from the runways, power stations and bridges that form the heart of the chancellor’s “plan for growth”. And against the right economic backdrop, rate cuts can act as a short-term mood-booster.
Yet the picture of the UK painted by the Bank’s quarterly inflation report, published alongside the 7-2 rate decision, is unambiguously bleak.
The MPC has halved its forecast for GDP growth in 2025, from the 1.5% it was predicting in November, to a sickly 0.75%. Economic output is expected to have contracted by 0.1% in the final three months of 2024 and expanded by just 0.1% in the current three-month period – narrowly skirting a recession, defined as two successive quarters of decline. Productivity, the Bank suggests – which Reeves badly wants to improve – has declined….
More here:
FTSE 100 finishes at new closing high after rate cut
Shares in London have closed at a new record peak, helped by the tumble in the value of the pound today.
The FTSE 100 index, which hit fresh intraday highs this morning, has closed up 104 points or 1.2% at 8727 points.
Daniela Sabin Hathorn, senior market analyst at capital.com, says:
The Bank of England has cut rates by 25 basis points as widely expected.
The vote split showed all nine MPC members were in favour of cutting rates in February, suggesting the central bank is more confident in its attempt at normalising their policy rates given the softening in inflationary pressures. Two MPC members voted to go further and cut rates by 50 bps at this meeting. Dhingra should not be a surprise as she has been a long-term dove within the central bank, but Catherine Mann’s vote seems slightly unexpected. This has given the meeting more of a dovish tone, leading markets to bring forward the expectations on when the next rate cut will be, from June to May.
This repricing in expectations has caused the UK gilt yields to drop alongside the pound. GBP/USD has retraced some gains achieved earlier this week as the more dovish BoE further widens the yield differential between the US and the UK. Meanwhile, UK stocks are taking advantage of the increased odds of more rate cuts with the FTSE 100 delivering another strong performance and breaking to a new all-time high.
Analysts at ABN AMRO argue that the Bank of England’s decision today is “less dovish than meets the eye”.
They have raised their forecast for UK interest rates in 2026 to 3.5%, which is a quarter-point higher than before.
For one thing, they think the Bank’s ambition to keep cutting rates could be thwarted if inflation runs too high, saying:
With the MPC seeming to give high wage growth the benefit of the doubt, and given the tepid nature of the recovery, we see the MPC continuing to cut rates in the near-term, but at a gradual, 25bp-per-quarter pace (at the May, August and November meetings).
Previously, we expected a pause at the May meeting. However, we think inflation will take longer than the MPC thinks to get back to the 2% target, and as such we see Bank Rate settling at a higher 3.5% level in 2026, compared with our previous expectation for a fall to 3.25%.
This would leave Bank Rate just within the upper end of neutral rate estimates (these were updated in today’s MPR to between c2.25-3.9%). While we have removed our expectation for a near-term pause in rate cuts, we see a significant risk that the MPC has to pause or even abort rate cuts later this year, particularly if wage growth does not fall as sharply as survey indicators currently suggest.
ABN AMRO also suggest the markets have overreacted to Catherine Mann’s decision to vote for a half-point cut today – something they call a “puzzling dissent”.
While not specifically attributed by name, the minutes said of one of the 50bp dissenters: “a more activist approach at this meeting would give a clearer signal of financial conditions appropriate for the United Kingdom, even as monetary policy would need to remain restrictive for some time to anchor inflation expectations, and Bank Rate would likely stay high given structural persistence and macroeconomic volatility.”
Given the hawkish tone of the latter part of this statement, this almost certainly refers to Catherine Mann. While a puzzling move, Mann appeared to want to counter the unwarranted tightening of financial conditions driven by the rise in US bond yields, which has also spilled over to UK gilt (and other European bond) yields.
It is likely therefore that Mann remains on the hawkish end of the spectrum fundamentally, and financial markets – which responded initially by raising expectations for BoE cuts – arguably overreacted to the news.
Today’s interest rate cut should be good news for UK housebuilders, who could see higher demand once it’s cheaper to borrow to buy a home.
Georgina Hamilton, fund manager for the Polar Capital UK Value Opportunities Fund, says:
“The voting split was more dovish than forecast with two members voting for a 50 basis point cut.
This is likely to lower the forward interest rate curve towards the MPC’s forecast of 4 rate cuts this year which in turn should lower the mortgage rate. The 5-year swap rate, the key metric from which mortgage rates are calculated moved down on the news and is actually lower than at the October Budget. This should be good for housebuilding shares, REITs and domestic consumer shares more broadly”.
Rate cuts expected in May and August
The money markets are sending a clear signal about how investors see UK interest rates changing over the next few months.
The next cut to UK interest rates, to 4.25%, is fully priced in for May – which is the next time the Bank of England will update its economic forecasts and publish a new Monetary Policy Report.
A further quarter-point cut is fully priced in by August (when we’ll get another MPR).
Will there be a fourth cut in 2025? The markets suggest there’s a chance – as 63 basis points (0.63 percentage points) of cuts are priced in by the end of December….
FOC CEO quits unexpectedly
Kalyeena Makortoff
The chief executive of the UK’s Financial Ombudsman Service has unexpectedly resigned, months after the chancellor called for a formal review of the body as it faced growing complaints over its role in the motor finance commission scandal.
Abby Thomas had only been in the role since October 2022, but was facing mounting criticism from lenders, which claim the FOS has been making decisions out of line with FCA rules, particularly in regard to complaints over undisclosed commissions on car loans.
That, lenders say, has been muddying regulatory waters and making it harder to lure investors to the UK.
Chancellor Rachel Reeves used her Mansion House speech in November to call for reforms to the FOS:
“The Financial Ombudsman Service plays a vital role for consumers to get redress when things have gone wrong, and that will not change. But reform is needed to create a surer climate for investment.”
City bosses such as Phoenix chief Andy Briggs have called for more stringent oversight of FOS operations. Briggs told the Lords financial services regulation committee last month:
“I would move the FOS underneath the FCA, so the FCA set the principles and standards of consumer protection [and] consumer regulation, but then the FOS have to work within those FCA rules, rather than a different set of rules.
“I think that would be a really beneficial, symbolic action to overseas investors, to say, ‘right this government is going to face into this fear of retrospective regulation’”
The FOS would not comment on whether the motor finance matter influenced Thomas’ resignation, pointing only to a statement which announced her departure and thanked her for her work.
MPs on the Treasury committee are due to grill FOS bosses about her departure next Tuesday, during a session focused on motor finance that Thomas was expected to attend.
*Note: this post was amended to correct the surname of the FOS CEO Abby Thomas
Bank of England policymaker Catherine Mann’s surprise decision to vote for a 50 basis point rate cut is giving the market “food for thought”, says Kathleen Brooks, research director at XTB.
Mann is an arch hawk, who has mentioned in previous speeches her preference for a ‘shock and awe’ approach to rate cuts, i.e., bigger cuts when the going gets tough for the economy.
The fact that she thinks the economic picture is so dire that we need a 50bp rate cut, is a sign that the BOE could be behind the curve when it comes to setting interest rates at an appropriate level for the UK economy.
Brooks adds that the UK’s fiscal watchdog, the Office for Budget Responsibility, is “all but certain” to cut its growth forecasts, saying:
This is a blow to the government, and suggests that the government will need to decide: 1, does it balance the books (raise taxes) or 2, take a pro-growth stance, like it professes to do? Depending on what the Chancellor does next month, this could have a big impact on the BOE’s future policy path.
Pound on track for worst day in a month
The pound is on track for its biggest one-day fall in a year, dragged down by today’s UK interest rate decision.
Sterling is down almost one cent against the US dollar this afternoon at $1.241, which would be its biggest one-day drop since 10 January.
[It did suffer a sharper plunge on Monday, on trade war fears, but then reversed after Donald Trump delayed tariffs on Mexico and Canada].
The pound has weakened to reflect “the dovish shift in thinking amongst MPC members”, says Lee Hardman, currency expert at MUFG Bank.
Hardman told clients:
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The BoE cut rates again by 25bps to 4.50%. However, two dissenters voted in favour of a larger 50bps rate cut.
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MPC members have become more pessimistic over the UK economic outlook creating more room to lower rates to less restrictive levels.
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We still expect another gradual 25bps cut at the May MPC meeting but there is a higher risk of faster easing being delivered.
ING predict three more interest rate cuts this year
James Smith, developed markets economist at ING Bank, says the Bank of England’s decision, which saw two members vote for a more aggressive rate cut, has caught markets slightly off-guard.
But the overall message is a gradual one and they’re sticking to their call of four rate cuts in total this year.
Smith says:
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More dovish tint to the vote split is offset by a fairly hawkish set of forecasts.
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Overall message was one of gradualism on future rate cuts.
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Interest rate expectations across the curve are around 8bp lower, which takes the market closer to pricing four full rate cuts in 2025 – one per quarter.
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We still expect the next cut in May, with further moves in August and November.
Investec confirm that the voting split at the Bank of England this month was a surprise, telling clients:
Surprisingly the vote was 7-2, with the dissenters preferring a 50bp cut. Dove Swati Dhingra and former hawk Catherine Mann both voted for a 50bp reduction. We had expected an 8-1 vote, with Mann voting for unchanged rates.
That two members voted for a more aggressive 50bp cut is clearly a more dovish outturn than expected, However the seven majority members also entertained some differences between them.
One group suggested that the disinflation process remained on track and was consistent with a continuation of the MPC’s gradual approach, leaning against inflation, but also being careful of increased uncertainty and two-sided risks to inflation.
The other group was less sanguine on inflation. It argued that upside news on inflation and pay in conjunction with disappointing news on activity largely reflected weak productivity trends. This implied a lower economic supply capability and that as a result, less spare capacity would be opened up if activity stayed weak
Simon French, chief economist at Panmure Gordon, has spotted that the Bank of England has raised its forecast for gas prices this year by 15 percentage points.
That – a key factor behind the Bank’s forecast for higher inflation this year – shows “the materiality of energy security”, he argues:
The 15% increase in the gas price assumption for 2025 from the BoE – that arithmetically pushes forecast CPI inflation to 3.7% in Q3 – shows the materiality of energy security to the UK cost of capital/ disposable incomes. Remains a Securonomics anomaly that external LNG supply… pic.twitter.com/dkvgnlxhKd
— Simon French (@Frencheconomics) February 6, 2025
Modupe Adegbembo, economist at Jefferies, points out that the Bank of England is in a “difficult” spot, saying:
“The Bank of England cut rates as widely expected
“The dovish vote split drove the initial reaction in markets with two members voting for a 50bp cut, but it seems that some on the MPC are not convinced and are still keen to proceed ‘gradually and carefully’.
“At the same time, the BoE’s inflation forecast stands out, with the MPC now expecting inflation to rise to 3.7% next year, close to double the Bank’s target.
“This will add to fears of stagflation that have driven UK markets in recent weeks.
“This leaves the BoE in a difficult spot, but it’s clear the cutting bias remains, and we continue to expect the BoE to cut rates three more times this year.”
Starmer welcomes rate cut
Sir Keir Starmer has joined chancellor Rachel Reeves in welcoming today’s Bank of England interest rate cut.
The prime minister says people would have “more money in their pockets” following today’s decision, telling broadcasters:
“I think it’s important to look at what’s happened. The interest rate has come down, that’s the third drop in interest rates since July.
“That’s good news because for many people watching this it means they will have more money in their pockets.
“Wages are going up higher than inflation, so again people feel better off. The minimum wage has gone up.”
Starmer added:
“We are absolutely determined we are going to grow the economy, and I don’t mean a line on a graph, I mean people feeling better off.”
Factcheck: People on tracker mortgages should have more money, as lenders pass today’s rate cut along. But (as was flagged in the BoE press conference), someone coming off, say, a five-year fixed mortgage this year will still face higher borrowing costs – as rates were at record lows until the end of 2021.
Also, savers will have less cash in their pockets, prime minister, if other bank’s follow Santander’s lead and lower savings rates (see earlier post).
Lib Dems: “putrid growth figures” are wake-up call for Reeves
The Lib Dems have said the latest “putrid growth figures” should be a wake-up call for Rachel Reeves.
Following the news that the Bank of England has halved its forecast this year, to just 0.75%, Liberal Democrat Treasury spokeswoman Daisy Cooper MP said:
“The new growth forecast needs to be a wake-up call for the Chancellor.
“Our economy will never see the back of the years of Conservative economic vandalism if she continues to push ahead with her misguided national insurance hike.
“Reeves must also change course on her baffling refusal to negotiate a bespoke UK-EU customs union to turbocharge growth.
“People are still having to choose between heating and eating, and being forced to use public services that are completely broken. Without an economy that is thriving, none of this will change.
“Rachel Reeves needs to see sense, scrap her national insurance rise, which is hammering small businesses, and jettison her short-sighted red lines on a customs union. Only then will we see an end to these putrid growth figures.”
The City does not, however, expect an interest cut as soon as next month.
The money markets indicate there’s a 78% chance that the Bank leaves rates on hold at its next meeting on 20th March, and just a 22% possibility of another cut.
Another quarter-point rate cut is fully priced in for May, though.
There is a “rising chance” of UK interest rates falling quicker to 3.50% and further, predicts City consultancy Capital Economics.
They say:
While cutting interest rates from 4.75% to 4.50% today, which was the third 25 basis point (bps) cut in seven months, the Bank of England showed some signs that it may cut rates faster and further than our forecast of a decline to 3.50% by early 2026.
That forecast is already below investors’ expectations of a fall to 3.75%. And with the Fed’s cutting cycle over, a big gap in UK/US interest rates is on the way.
