As we look ahead to tomorrow, and we get the decision on interest rates coming out from the Bank of England MPC’s first meeting of the year, will they cut rates by 0.25% to 4.5% as much of the market expects? And if so, what might that mean for the economy, for investors and for advisers and their clients?
Experts from across the profession have been sharing their interest rate predictions and analysis with us ahead of the meeting as follows:
Hetal Mehta, Head of Economic Research, St. James’s Place says: “At the December meeting, the BoE made a dovish pivot that signalled a willingness to support growth despite the inflation risks. It would come as a major surprise to economists and markets alike if the BoE did not vote to cut interest rates on Thursday.
“Unlike the Fed, the BoE will be less confident in the ‘solid’ nature of the labour market. Wage growth may be sticky, and surveys show price expectations have firmed in recent months but a variety of indicators are showing employment strains, complicating the policy stance. As such, it shouldn’t come as a surprise that the MPC will be most likely be split – even three ways.
“In the coming months and in the medium term, the BoE will have to monitor closely how the price signals manifest themselves in the data. High inflation risks the second-round effects being stronger; the pass-through from the National Insurance tax increases are likely to also keep the MPC cautious and only on a gradual cutting path.
“The news of tariffs levied by the US against Canada, Mexico and China will inevitably raise questions on how central banks – especially the ECB but also the BoE – should respond should they also be subject to such protectionist measures. It is too late for the BoE to adjust its forecasts and assumptions for global growth, but any further weakness in the euro area economy will likely spillover to the UK. For some MPC members, the case for a pre-emptive cut may be enhanced.
“One other point of interest in the Monetary Policy Report will be the Bank’s refreshed assessment of the supply side of the economy. Typically, the BoE and OBR have had very different views on potential growth, with the Bank being far more pessimistic. Latest upward revisions to long term net immigration should be a boost to the labour supply and therefore better for growth, although productivity and impacts on inflation are uncertain.”
Jeff Brummette, Chief Investment Officer at Oakglen Wealth comments ahead of Thursday’s Bank of England interest rate decision saying: “The recent softening of economic activity and inflation staying close to the 2% target for the ninth consecutive month will not have escaped the Monetary Policy Committee. Markets are broadly expecting the Bank of England to cut its base rate by 25bps on Thursday but the outlook for future cuts remains much more cloudy.
“Policymakers are still waiting to see the impact of the UK government’s October budget when it takes effect in April, but they must also now weigh the prospect of a trade war between the US and its trading partners, which saw the opening salvos over the past few days with President Trump declaring the imposition of tariffs on China, Canada and Mexico. Global growth prospects and the easing inflationary pressures are hanging in the balance.”
Peder Beck-Friis, Economist at PIMCO said that he and his team expect the Bank of England (BoE) to cut its policy rate by 25bps at Thursday’s meeting, to 4.5%. He said “Looking ahead, we see room for deeper cuts than what financial markets expect. Trade uncertainty is rising, labour demand is falling, fiscal policy is tight, and the policy rate is well above our neutral estimate of 2-3%.
“While inflation will likely rise in the coming quarters, the main driver—the national insurance hike—is a one-time tax shock that central banks typically look through. If wage growth falls and the labour market weakens, we expect the Monetary Policy Committee (MPC) to look through any short-term price pressures and instead focus on the medium-term outlook.
“Recent weeks have seen a significant decline in gilt yields. We think gilts remain attractive at their current levels.”
Chris Arcari, Head of Capital Markets, Hymans Robertson says: “Markets are pricing a 0.25% pa cut to the Bank of England’s (BoE) base rate tomorrow, with forecasts for a further two cuts in 2025, taking the base rate to 4.0% pa by year-end. While interest rates’ current level allows for a modest reduction, the stagflationary shock from the national insurance (NI) increase announced in the Autumn Budget, alongside high underlying measures of inflation, means the BoE is likely to adopt cautious messaging about cuts.
“Sure, the economy is showing little momentum, but the BoE’s mandate is price stability. And there are plenty of datapoints to keep it vigilant. The disinflation in goods, food and energy prices is now in the rear-view mirror and set to become a positive contribution in the year ahead. Consensus forecasts suggest UK headline inflation will rise to 3.0% year-on-year in the autumn. There are also questions about whether the BoE will be to ‘look through’ the forthcoming rise in headline inflation. Average weekly earnings growth rose 5.6% year-on-year in the three months to end-November, contributing to upwards pressure on sticky service-sector inflation, which was up 4.4% in the 12 months to end-December.
“Having said that, the BoE is going to have to walk a tightrope in the year ahead. The economy is stagnating, and the announced NI increase has driven growth and inflation in opposite directions: employment intentions have fallen while expected price growth and services output prices have risen, as employers cut back recruitment or look to pass on the NI increase via prices. Should weaker employment growth result in dwindling domestic demand and a larger output gap, reducing inflation pressure, we expect the BoE to cut rates more quickly. However, if inflation pressures persist, despite the weak growth backdrop, the central bank is likely to stay cautious.”
