Financial markets think the Bank of England will cut interest rates at its first Monetary Policy Committee meeting of 2025.
However, confidence in a second rate cut in 2025 has cooled. To further complicate matters, at least one large investment bank thinks the market’s longer-term outlook is incorrect.
What Is the Bank of England Base Rate?
Today, the UK’s base rate sits at 4.75% after two cuts in August and November last year. Shortly before Christmas, the MPC voted six to three to hold rates, amid sticky services inflation.
Persistent UK inflation has already led to fears the bank may keep rates higher for longer, putting pressure on those with significant debt and mortgage holders switching onto more expensive packages after their fixed-rate deals end.
The UK’s latest inflation data for the 12 months to December 2024 showed an increase to the Consumer Price Index of 2.5%. This means prices in the UK are still rising at a rate higher than the Bank of England’s 2% target.
Real uncertainty now surrounds the trajectory of interest rates in 2025. The UK’s recent gilt market turmoil showed how easily economic fears, and the threat of tariffs by a fresh Trump administration, can affect bond yields. If the Bank of England cuts rates when it issues its next decision on Feb. 6, equity markets will almost certainly rise, while bond yields will likely fall.
Will the Bank of England Cut Interest Rates?
The likelihood of an interest-rate cut by the Bank of England on Feb. 6 is around 92%, according to interest-rate swaps data. Currently, no further rate cuts in 2025 are anticipated. There is a 49.8% chance of a cut in August, the data shows—below the 50% threshold needed to indicate a probability in favor.
“It seems we have something of a conflict between what interest futures are pricing in—just 25bps cuts this year—and what investors are actually saying,” says Morningstar’s European Market Strategist Michael Field.
“The chances seem high for a cut on Feb. 6, with much of this optimism being based on the most recent inflation figure. To me, these inflation moves are very marginal. Ultimately, with rates in the UK at 4.75%, that seems excessively high, particularly given how far inflation has already fallen from the peaks.”
At the heart of the conversation is investment bank Goldman Sachs. Its analysts have now said they think there could be as many as six interest-rate cuts by the Bank of England by next spring. Its 2024 forecasts, made in December 2023, were broadly correct: The investment bank predicted that interest rates would be 4.75% by the end of the year, but it was wrong about the timing, predicting cuts in February and March—they were cut in August and November instead.
Factors supporting this hypothesis include low economic growth and the end of a “tight” labor market, in which there are more job opportunities than available workers and employees have bargaining power over pay.
What Will Equities and Bonds Do if the Bank of England Cuts Rates?
If the Bank of England cuts rates next month, equity markets will probably rise on optimism about the BOE’s inflation fight against inflation. Typically speaking, lower interest rates free up money in the real economy, which can be used for spending. Businesses and investors see this as a good thing.
However, this does come with a caveat. February’s MPC meeting will be accompanied by the publication of a fuller Monetary Policy Report, which it issues every quarter. That could well contain further information about what the Bank of England expects to happen this year. Traders and investors look to this kind of information to get a forward look at the bank’s intentions, so it will inevitably be market sensitive.
In its Monetary Policy Report accompanying its last interest-rate cut in November 2024, the Bank of England said it intended to reduce interest rates further—within reason.
“If inflation remains low and stable it’s likely that we will reduce interest rates further,” it said.
“But we have to be careful not to cut interest rates too quickly or too much. High inflation has affected everyone, but it particularly hurts though who can least afford it.”
If the Bank of England does cut again, bond yields will likely fall. Bond prices are sensitive to interest-rate changes because monetary policy affects demand for fixed-income securities. Falling interest rates usually cause investors to seek higher returns, which pushes bond prices upward—and yields downward.
At the moment, the yield on the 30-year UK gilt is around 5.12%. After a period of gilt turmoil, in which UK gilt yields rose to highs not seen since 2008, yields have fallen back, but still higher than a year ago.
When Is the Bank of England’s Next Meeting?
The Bank of England has a calendar of meetings and monetary policy publications, as the table below shows.
‘One-Dimensional’ Bank of England’s Role in Question
The Bank of England was made independent of government in 1997, when Tony Blair became prime minister and Gordon Brown was his new chancellor.
The policy of independence means the bank sets interest rates without interference from central government in Whitehall. This model follows that used by the US Federal Reserve, which sets interest rates without input from the White House.
However, some commentators believe there should be more similarities than just that.
Unlike the BOE, the Fed has a dual mandate of price stability and maximum employment. In a political environment where Keir Starmer’s government has committed itself to increasing economic growth, some say this model should be deployed in the UK.
In the wake of fresh UK consumer confidence figures last week, which showed a steep drop in consumer confidence in the UK economy, Jamie Constable, chief market strategist at Singer Capital Markets, says an immediate change is needed.
“Poor consumer confidence and flash purchasing manager indexes, highlighting companies raising prices and cutting jobs, point to a real need for the one-dimensional Bank of England inflation mandate to be revised to include jobs and de facto growth, as per the Federal Reserve,” he says.
“If the government is really serious about growth and wants to show it has some understanding of how the economy and incentives work, it should be making this change as soon as possible.”
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar's editorial policies.
