Bank of England (BOE) Assessment in February
2025-02-10
■ BOE decided to cut interest rates by 25bps, in line with market expectations but emphasized that the future economic outlook is highly uncertain
■ The Financial Policy Report mentioned that the estimated value of the long-term equilibrium interest rate has risen, and the number of interest rate cuts in the future may decrease.
On February 6, the Bank of England (BOE) announced the results of the year's first Monetary Policy Committee (MPC) meeting. As expected by the market, the policy rate was lowered from 4.75% to 4.50%. Seven policy committee members, including Governor Bailey, supported a 25bps rate cut at this meeting. In contrast, committee members Dhingra and Mann supported a 50bps rate cut, and no committee member advocated keeping the interest rate unchanged. Therefore, after the MPC results were announced, the market believed that the BOE's position was more inclined to cut interest rates than expected, and the UK government bond yields fell, weakening the pound.
However, judging from the Financial Policy Report (MPR) released by the BOE every quarter, the central bank's attitude can also be interpreted as not actively promoting interest rate cuts. The main reasons are: (1) the upward revision of the policy rate forecast for the first quarter of 2027, and (2) the upward revision of the estimated value of the long-term equilibrium interest rate. (1) Although the BOE statement mentioned that the forecast was based on market forward interest rates, it also stated that future interest rate cuts would be "more cautious", which is consistent with the two statements. In addition, the price forecast shown in the MPR pointed out that due to rising energy prices, the inflation rate is expected to rise to 3.7% year-on-year in the third quarter of 2025, and the inflation expectations for the first quarter of 2027 have also been raised. Simply this can be interpreted as "vigilance against rising prices will reduce the number of interest rate cuts." It is worth noting that Governor Bailey mentioned in December last year that there may be four interest rate cuts in 2025. (2) Although the BOE pointed out that the calculation results of different tools are different, the estimated value of the long-term equilibrium interest rate has been raised by about 25bps to 75bps compared with the "2-3%" in 2018, which may also mean that the number of interest rate cuts in the future will be reduced.
In addition, after the MPC meeting, Governor Bailey told the media that "the market needs to read the meeting minutes more carefully", which further highlights the BOE's uncertainty about the future economic outlook. Key factors that the BOE is concerned about include the direction of the US government's tariff policy and the impact of the UK government's budget (such as adjustments to national insurance premiums). At present, the US tariff measures are still mainly aimed at China, while the UK government's corporate response measures have not yet been fully clarified, and the spring budget will be released in March. So, the BOE is still closely monitoring the development of the situation. At the same time, the BOE also stated that it would adjust its monetary policy stance based on future economic conditions. Although the BOE maintains the trend of interest rate cuts overall, there is still uncertainty about the pace and final level of interest rate cuts, and market expectations may continue to fluctuate.
■ The Financial Policy Report mentioned that the estimated value of the long-term equilibrium interest rate has risen, and the number of interest rate cuts in the future may decrease.
On February 6, the Bank of England (BOE) announced the results of the year's first Monetary Policy Committee (MPC) meeting. As expected by the market, the policy rate was lowered from 4.75% to 4.50%. Seven policy committee members, including Governor Bailey, supported a 25bps rate cut at this meeting. In contrast, committee members Dhingra and Mann supported a 50bps rate cut, and no committee member advocated keeping the interest rate unchanged. Therefore, after the MPC results were announced, the market believed that the BOE's position was more inclined to cut interest rates than expected, and the UK government bond yields fell, weakening the pound.
However, judging from the Financial Policy Report (MPR) released by the BOE every quarter, the central bank's attitude can also be interpreted as not actively promoting interest rate cuts. The main reasons are: (1) the upward revision of the policy rate forecast for the first quarter of 2027, and (2) the upward revision of the estimated value of the long-term equilibrium interest rate. (1) Although the BOE statement mentioned that the forecast was based on market forward interest rates, it also stated that future interest rate cuts would be "more cautious", which is consistent with the two statements. In addition, the price forecast shown in the MPR pointed out that due to rising energy prices, the inflation rate is expected to rise to 3.7% year-on-year in the third quarter of 2025, and the inflation expectations for the first quarter of 2027 have also been raised. Simply this can be interpreted as "vigilance against rising prices will reduce the number of interest rate cuts." It is worth noting that Governor Bailey mentioned in December last year that there may be four interest rate cuts in 2025. (2) Although the BOE pointed out that the calculation results of different tools are different, the estimated value of the long-term equilibrium interest rate has been raised by about 25bps to 75bps compared with the "2-3%" in 2018, which may also mean that the number of interest rate cuts in the future will be reduced.
In addition, after the MPC meeting, Governor Bailey told the media that "the market needs to read the meeting minutes more carefully", which further highlights the BOE's uncertainty about the future economic outlook. Key factors that the BOE is concerned about include the direction of the US government's tariff policy and the impact of the UK government's budget (such as adjustments to national insurance premiums). At present, the US tariff measures are still mainly aimed at China, while the UK government's corporate response measures have not yet been fully clarified, and the spring budget will be released in March. So, the BOE is still closely monitoring the development of the situation. At the same time, the BOE also stated that it would adjust its monetary policy stance based on future economic conditions. Although the BOE maintains the trend of interest rate cuts overall, there is still uncertainty about the pace and final level of interest rate cuts, and market expectations may continue to fluctuate.