BANK OF ENGLAND CUTS RATES - FEBRUARY 2025

The Bank of England, the UK's central bank, today cut rates by 25bp from 4.75% to 4.50% on weaker than expected economic growth.

What is the market reaction?

The market reaction is an increase in the FTSE 100 for two reasons: firstly lower borrowing costs are positive for corporate earnings, secondly Sterling has weakened on the news (reflecting the weaker economic growth outlook).  Because FTSE 100 companies have predominantly USD-linked earnings, the translation effect makes the FTSE 100 look higher when Sterling weakens relative to the Dollar.

What is the outlook for the UK economy

We focus on the three key macro drivers for the UK economy: Growth, Inflation and Rates.
The Bank of England's central projections consistent with the MPC's forecast were changed as follows, relative to their November 2024 meeting:
2025 GDP Growth was downgraded from +1.50% to +0.75%
2025 CPI Inflation was upgraded from +2.75% to +3.50%
The expected interest rate at the end of the three forecast period were increased from 3.50% to 4.00%.
In summary this shows lower growth, higher inflation and higher terminal rates.
(See chart)

Might the Bank of England cut more?

The Monetary Policy Committee (MPC) vote was 7-2 in favour of a 25bp cut.  Interestingly 2 voted to cut rates even deeper by 50bp to 4.25% to support economic growth

Summary

​After being slow to respond to the inflation shock in 2022, it now looks as though the Bank of England may have overtightened relative to growth and is now exposed to "stagflation risk".  Stagflation is when the economy is caught in a lower growth and higher inflation trap.  This will be a challenge for policymakers to navigate.