The Bank of England (BoE) will likely hold interest rates at 4.75% on Thursday this week, FactSet consensus indicates.
The Bank’s monetary policy committee will meet on Wednesday and vote on the decision prior to a Thursday midday announcement. Currently, market pricing suggests a less than 10% likelihood that the Bank will cut this week.
As the meeting will be the MPC’s last of 2024, traders and investors will be watching keenly for signals about what could happen in 2025, looking closely at the accompanying statement.
“Rate cut expectations have fallen rapidly over the course of 2024, as central bankers proved more cagey than investors had hoped, and inflation proved a tad stickier,” says Morningstar European equity strategist Michael Field.
“Central banks also do not work along calendar years, so are in no rush to get in another cut before we close out 2024. The Bank of England is now something of an anomaly among Western Central Banks, with rates still high at 4.75%, but the market is pricing in another 80+ basis point cuts in 2025. Good things come to those who wait.”
UK Economy is Not Growing
The decision comes amid concern last week about UK gross domestic product (GDP) growth. In figures released last week for the month of October, Britain’s economy shrunk by 0.1%, the second such contraction in as many months.
“The outlook for inflation in the UK remains uncertain.” says Lindsay James, investment strategist at Quilter Investors.
“However, with growth still weak while signs emerge that wage inflation will be meaningfully lower in the year ahead, the Bank may make a return to cuts in the new year.”
Over in the US, the Federal Reserve is expected to cut rates once more when it meets on Wednesday this week. A December cut this week would be its third in a row.
Will The Bank of England Still Cut Rates in 2025?
Despite the strong possibility of a rate hold, professional investors are still expecting a series of rate cuts from the Bank of England in 2025.
As ever, the Bank remains cautious in the way it manages expectations. Governor Andrew Bailey has always said that rates should not fall too far too quickly. But he has also recently signaled there could be four rate cuts next year. Rhetoric like that will soothe anxiety in Whitehall about the cost-of-living pressure voters are dealing with, but it might not be enough to convince larger employers, who bear the brunt of the government’s October Budget increases to employer national insurance contributions.
Why does this matter? It matters because investors widely consider the effect of the October Budget to be inflationary because of the increased spending measures included within it. In a candid moment, Bailey himself recently said the National Insurance policy is the “biggest issue” the wider UK economy faces post-Budget.
Why is UK Inflation Rising?
The Bank of England’s announcement this week also comes against the backdrop of rising UK inflation. On Wednesday this week, the day before the Bank will announce its decision, the Office for National Statistics will publish new Consumer Price Index (CPI) figures for the UK.
According to FactSet consensus, UK CPI is forecast to move upwards to 2.7% for the month of November—from 2.3% in October. If this projection is indeed correct, it would place UK CPI 0.7% higher than the Bank of England’s own official 2% inflation target, and would mirror a wider western trend of resurgent inflation.
This year, the Bank of England did manage to bring inflation down to 2% in May, but the trend since then has been upwards. In ONS figures released in November covering the month of October, the UK statistics body said headline CPI was running at 2.3%—higher than markets and traders had expected.
How The Bank of England’s Decision Will Effect Savers and Investors
Falling interest rates tend to support higher equity valuations, so on a very basic level equity investors shouldn’t expect to be celebrating. However, futures trading means the Bank’s intentions are probably already priced in, so drama there should be none. If there is a shock rate cut, equity markets will almost certainly rise.
For savers on variable rate mortgages, a rate hold means the cost of servicing debt will stay roughly the same, while those on fixed-rate products will be hoping for a rate cut to come before they next remortgage. Those with significant credit card debt will feel the pain of what is clearly the “higher for longer” interest rate environment.
To that end, investors concerned about how best to utilize this situation should look outside of fixed income. That’s according to Morningstar Investment Management’s 2025 Outlook report.
“We believe looking to assets outside of fixed income as diversifiers may be wise given the uncertainty regarding inflation and interest rates, which has been amplified following the 2024 US election results, it says.
“In this scenario, we look to historical periods for guidance, such as those before the 2000s when we experienced ultralow inflation and interest rates. In this environment, bonds did not always act as the equity hedge that many investors hoped for. Instead, many liquid alternative strategies were better equity diversifiers than fixed income.”
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar's editorial policies.
