Bank of England’s February Rate Cut: A Pivotal Shift in Monetary Policy?

The Bank of England (BoE) took a significant step in its monetary policy trajectory on February 6, 2025, cutting its benchmark interest rate by 25 basis points to 4.5%. This move, while not entirely unexpected, has stirred market reactions and ignited debates about the future course of UK monetary policy. The latest decision, coupled with a notable divergence in views among policymakers, indicates a potential shift in the BoE’s stance for the rest of the year.

Diverging Views Within the Monetary Policy Committee

The BoE’s Monetary Policy Committee (MPC) saw an unusual split in voting patterns. While seven members supported the 25bp cut, two members—Swati Dhingra and Catherine Mann—pushed for a more aggressive 50bp reduction. Mann, previously known for her hawkish stance, made a surprising pivot, citing the need for a “clear signal” on the future direction of interest rates.

The debate within the MPC underscores the complexity of the UK’s economic landscape. A key factor behind the rate cut decision is the unique structure of the UK mortgage market. Unlike in some other economies where variable-rate mortgages dominate, the UK has a higher prevalence of short-term fixed-rate mortgages. This structure delays the transmission of rate cuts to household finances, making a strong argument for front-loading monetary easing.

Economic Projections and Inflationary Concerns

Alongside the rate cut, the BoE revised its economic forecasts. Growth projections for 2025 were slashed from 1.5% to just 0.75%, signaling concerns about the UK’s economic momentum. Additionally, the BoE acknowledged the likelihood of a short-term inflation uptick, projecting a peak of 3.7% later in the year before gradually returning towards the 2% target. This inflation outlook is a critical element shaping the pace and magnitude of future rate cuts.

Despite the rate cut, the BoE’s latest forecasts remain relatively hawkish, with inflation still expected to hover above the target in two years’ time. Market pricing ahead of the decision suggested expectations for four full rate cuts in 2025—one per quarter—a forecast that now seems more plausible given the MPC’s tone.

Market Reactions and Financial Implications

The financial markets reacted swiftly to the BoE’s announcement. The British pound depreciated by approximately 0.8%, settling around $1.241 as investors reassessed their expectations for the Bank’s monetary policy trajectory. Meanwhile, the FTSE 100 index surged to a record high of 8,727.28 points, reflecting optimism that looser monetary conditions could support corporate earnings.

The modest decline in UK bond yields suggests that markets have now fully priced in four rate cuts for the year. Interest rate futures indicate a strong probability of additional easing, potentially as early as May 2025. However, given the MPC’s cautious messaging, the pace of these cuts remains uncertain.

Global Trade and External Risks

Governor Andrew Bailey emphasized external risks impacting the UK economy, particularly rising global trade tensions. Potential tariffs from the United States and broader geopolitical uncertainties could weigh on UK exports and economic performance. This added layer of external pressure will likely be a key consideration in future BoE decisions.

The Road Ahead: Gradualism or Acceleration?

Looking forward, the BoE’s stance suggests a preference for a measured pace of monetary easing. While the case for rate cuts has strengthened amid economic headwinds and inflationary pressures, policymakers remain cautious about moving too aggressively.

With services inflation expected to decline in Q2 and labor market data showing early signs of weakness, the probability of another rate cut in May remains high. ING analysts maintain their forecast for a total of four cuts in 2025, with further reductions anticipated in August and November.

The BoE’s February rate cut marks a turning point in its policy cycle, but the path forward remains data-dependent. As the UK economy navigates shifting global and domestic conditions, the central bank’s approach will be closely scrutinized by markets and policymakers alike.

Conclusion

The BoE’s latest decision reflects a balancing act between supporting economic growth and maintaining inflation control. While the debate within the MPC suggests the possibility of a more aggressive stance, the central bank is likely to continue its gradual approach unless economic conditions deteriorate further. For businesses, investors, and consumers, staying attuned to future BoE statements will be essential in navigating the evolving financial landscape.