The Bank of England is expected to continue its gradual interest rate reduction approach, with a likely rate cut of 0.25% in its upcoming meeting on February 6. This decision is expected to receive broad support, with eight members voting in favor of the cut while one member remains opposed. Markets anticipate further interest rate cuts throughout 2025, bringing the total reduction to 1% by the end of the year, with expected quarterly cuts.
Regarding economic growth forecasts, expectations for 2025 are likely to be revised down to around 1% instead of 1.5% due to weaker economic data and rising market interest rates. This adjustment comes at a time when economic challenges are increasing, including expectations of reduced government spending in the coming months.
On the other hand, despite these challenges, inflation in the UK is expected to remain under control in the medium term. It is anticipated to rise slightly to 3% due to energy price effects but will remain below 2% over the next two years. Meanwhile, inflation in the services sector is expected to continue declining, potentially falling below 4% by the second quarter of 2025. Additionally, the labor market, which is struggling with weak job growth and rising unemployment rates, will continue to pose an additional challenge for the bank’s economic policy.
While the Bank of England may persist with its gradual rate-cutting policy, there is a possibility of a larger cut if inflationary pressures persist or if the labor market deteriorates further. In financial markets, short-term government bond yields are expected to decline, while long-term yields may remain influenced by U.S. interest rate movements.
As for the British pound, it has seen slight improvement recently but is likely to face further pressure due to expectations that the government may begin spending cuts in March. With the Bank of England continuing to lower interest rates, the pound may weaken further, with projections placing it around 1.20 against the U.S. dollar by the second quarter of 2025.
Overall, the Bank of England is expected to maintain its gradual interest rate reduction policy while monitoring the effects of inflation and the labor market despite challenging economic conditions.
