Bank of England cuts rates as expected but may slow the pace of easing on expectations that inflation will rise

On Nov 7, 2024

The Bank of England cut interest rates by 25 basis points from 5% to 4.75%, following BoE MPC 8-1 vote to cut rates.

This was the second rate cut since 2020, and BoE is likely to keep cautious approach in anticipation that new government’s first budget, which involves big increases in spending, borrowing and tax, will lead to faster economic growth and higher inflation that would result in gradual policy easing in the near future.

BoE Governor Bailey reiterated that policymakers would continue to closely watch inflation, to make sure it stays near the target and avoid problems which may arise from too quick or by too much rate cuts.

The BoE did not talk about Donald Trump’s election victory, which has significantly lowered bets for aggressive Fed rate cuts but said that they will watch for trade policies that Trump has proposed, thought it is too early to draw any conclusion.

The BoE kept cautious stance on future interest rate cuts trajectory, which suggest that BoE will remain at a lower speed in policy easing, compared to the European Central Bank.

This leads to conclusion that the upward pressure on inflation from the budget, growing global risks and possible new US tariffs, would persist, despite interest rates falling further, although at a lower pace than initially expected.

After today’s rate cut and signals of changing environment, markets expect around two interest rate cuts from the BoE in 2025, compared to previous projections which anticipated more easing next year.

British pound reacted positively on today’s hawkish rate cut and cracked psychological 1.30 barrier, which marks the first significant barrier, ahead of the base of thick daily Ichimoku cloud at 1.3049.

Sterling may benefit further from BoE’s expectations for inflation to rise towards 2.5% by the end of the year and hit 2.7% by the end of 2025, when it is expected to start to decline gradually and eventually fall below the central bank’s 2% target, towards the end of projected three-year period.