Published by Global Banking and Finance Review
Posted on February 6, 2025
By William Schomberg
LONDON (Reuters) - The Bank of England looks set to cut interest rates on Thursday for only the third time since just after the start of the COVID-19 pandemic in 2020, as it juggles the need to help the sluggish economy with still-strong inflation pressures.
Hit by worries about finance minister Rachel Reeves' tax increases for employers, the risk of a global trade war led by U.S. President Donald Trump and rising costs, the British economy has barely grown since mid-2024.
But price pressures remain hot, limiting what Governor Andrew Bailey and his colleagues can say on Thursday about their plans for 2025.
The BoE's benchmark Bank Rate stands at 4.75%, the highest among big rich economies. Thursday's widely expected quarter-point cut would bring it to the same level as in Norway and close to the U.S. Federal Reserve's 4.25-4.5% range.
The European Central Bank has reduced rates five times since mid-2024 compared with the BoE's two cuts, reflecting the weaker inflation dangers in the euro zone.
At its last meeting in December, the BoE's Monetary Policy Committee voted 6-3 to keep rates on hold.
SIGNS OF STAGNATION
Matt Swannell, chief economic advisor to the EY ITEM Club, a forecasting organisation, said growing signs of stagnation in Britain's economy were likely to weigh on more of the BoE interest rate-setters.
"That does not take away from the longer-term dilemma facing the BoE, as its latest set of projections are likely to show that growth will be weaker but near-term inflation will be higher than when it met three months ago," Swannell said.
The BoE will publish its latest projections for the economy as well as its decision on interest rates at 1200 GMT, 30 minutes before Bailey and other senior officials are due to hold a press conference.
Investors are pricing at least three quarter-point cuts by the end of 2025, while most economists polled by Reuters last month predicted a total of four.
That would be good news for Prime Minister Keir Starmer and Reeves, who risk being knocked off course to meet their fiscal rules by high borrowing costs and the slowing economy, potentially requiring more tax increases or spending cuts to get back on track.
However, the BoE is also worried about price pressures. Surveys have shown consumers increasing their expectations for inflation and companies planning to raise prices in the year ahead. Wage growth unexpectedly sped up in late 2024.
"The MPC's cutting cycle is entering a more difficult phase," economists at Citi said in a note to clients. "A reversal in energy prices alongside a sharp increase in labour costs suggests a renewed pickup in inflation – we think to 3.5% in April. This is even as the labour market deteriorates."
Inflation stood at 2.5% in December, above the BoE's 2% target, and some analysts have forecast it will jump to 3% in January on the back of higher domestic fuel costs.
(Writing by William Schomberg; Graphic by Sumanta Sen; Editing by Alex Richardson)
