Key information
- A measured approach to rate cuts by the Bank of England is expected this year.
- The Bank could take an intermediate stance, with four rate cuts planned – one per quarter.
- Trump’s tariffs could help reduce inflationary pressures, according to two CPM members.
The Bank of England’s approach to 2025
This year, the pace at which the Bank of England adjusts interest rates will be a key point of focus for financial markets. The Bank’s actions this year, with only two rate cuts, have resulted in a current discount rate of 4.75 percent. Recent economic data suggests that a measured approach to easing could continue through 2025.
Recent economic data and market expectations
Official figures for December indicate that inflation rose to 2.6 percent in November, in line with expectations but demonstrating its persistent nature. Wage growth has exceeded market forecasts, implying continued inflationary pressures. Therefore, the Bank chose to maintain its rates in December. The Bank’s guidance also remained largely unchanged, emphasizing a “gradual” path of rate reductions while citing economic uncertainties.
The voting pattern within the Monetary Policy Committee (MPC)
However, the voting method within the Monetary Policy Committee (CPM) surprised the markets. Three out of nine members voted in favor of further rate cuts, mainly due to the UK’s recent economic performance. GDP figures showed a contraction of 0.1 percent in October, marking the second consecutive month of decline. The Bank forecasts a stagnant economy for the final quarter of 2024. Growth has been minimal since the summer, and the recent budget did not ease the burden on businesses.
Outlook for 2025
Looking ahead to the new year, economists predict that policymakers will prioritize sluggish growth over lingering inflationary concerns. Guillaume Derrien, senior eurozone economist at BNP Paribas, points out that while wage pressures exist in the UK, economic activity is significantly less robust than in the US. Mr Derrien suggests the Bank of England will likely take an intermediate stance in 2025, with four rate cuts anticipated – one per quarter. Ruth Gregory, deputy chief UK economist at Capital Economics, agrees with this view and maintains her forecast for rate cuts of 25 basis points each quarter.
The impact of Trump’s tariffs
An additional factor influences the decisions of the monetary policy committee: Donald Trump’s impact on interest rates. The extent to which its tariffs will affect the global economy remains uncertain due to the lack of clarity surrounding their specifics. At its last meeting, the Monetary Policy Committee recognized the potential importance of Donald Trump’s influence on trade policy, but refrained from estimating its concrete impact. He said that while indicators of trade policy uncertainty have increased significantly, the precise scale and direction of any impact on UK inflation is not clear at present, and these effects may not be immediately apparent.
Trump’s impact according to some experts
Despite this reluctance to speculate, two CPM members, Swati Dhingra and Clare Lombardelli, have suggested that Trump’s tariffs could help reduce inflationary pressures. They claim that significant tariffs on Chinese imports would encourage Chinese producers to reduce their prices in order to maintain their market share.
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