By Andy Bruce
(Reuters) – The Bank of England looks likely to cut interest rates next week, when it could also nudge investors to expect faster reductions than they currently predict as the economy flatlines.
Economists polled by Reuters unanimously expect the BoE to cut its benchmark rate to 4.5%, from 4.75%, on Feb. 6, when it will also update its economic growth and inflation forecasts. Investors see a nearly 90% chance of a cut next week.
Since the BoE published its last projections in November, the economy has stagnated and measures of inflation most closely watched by rate-setters dropped last month – although wage growth unexpectedly accelerated.
With the data offering mixed signals on the outlook, investors will be sensitive to any changes in the views of Monetary Policy Committee members. In December, six voted to keep rates on hold while three backed a quarter-point cut.
Rate-setters could give an early steer on a key question for the inflation outlook: how will employers respond to the government’s Oct. 30 budget, which imposed a large hike in payroll taxes from April.
Financial markets on Wednesday priced in almost three quarter-point BoE rate cuts this year, compared with fewer than two in early January, when there was a sharp but short-lived surge in British government bond yields.
SHIFTING US RATE EXPECTATIONS
Driven by shifting U.S. rate expectations ahead of President Donald Trump’s inauguration and unease around Britain’s public finances, the sell-off forced finance minister Rachel Reeves to say she would act to meet her fiscal rules if needed.
She is probably hoping for a dovish turn by the BoE. The rise in government borrowing costs since the budget risks knocking her off course to meet the fiscal rules, potentially requiring tax hikes or spending cuts to get her back on track.
Expectations for BoE rate cuts priced by markets may be too incremental for the MPC’s liking, with some members likely to emphasise risks from a weak economy, as well as a worsening outlook in the euro zone.
The European Central Bank has already reduced rates four times since mid-2024 – compared with twice for the BoE – and looks all but certain to deliver a fifth cut on Thursday.
“Although a dovish statement from the BoE can be expected to keep the pound on the back foot in the near-term, it would also provide comfort for investors and the business community,” said Jane Foley, senior FX strategist at Rabobank.
Public comments by MPC members have been thin on the ground since the start of the year. Those who have offered views have tended to stress the potential for lower interest rates.
