The Bank of England is set to announce its first monetary policy decision of 2025, with a 25 bps rate cut widely anticipated. While the market reaction to the rate decision is expected to be muted, the BoE's economic projections and guidance will be closely watched. Softer inflation figures are overshadowed by concerns about slowing UK growth, raising questions about the future path of interest rates.
The Bank of England (BoE) is set to announce its monetary policy decision on Thursday, marking the first meeting of 2025. Market expectations strongly point towards a 25 basis point (bps) reduction in the benchmark interest rate, bringing it down to 4.5% following a series of 50 bps cuts throughout 2024.
This BoE Super Thursday will also see the release of the meeting Minutes and the Quarterly Inflation Report, alongside a press conference by Governor Andrew Bailey to explain the rationale behind the policy decisions. While the 25 bps interest rate cut is already largely priced in, the focus will be on the BoE's guidance and economic projections. Recent UK data paints a mixed picture. On one hand, inflation has shown signs of softening, with the annual headline inflation rate dropping to 2.5% in December from 2.6% in November, and core inflation falling to 3.2% from 3.5%. Notably, services inflation came in at 4.4% year-on-year, below the BoE's projections. However, economic growth has been sluggish at best. The UK Gross Domestic Product (GDP) registered no growth in the third quarter of 2024, revised down from an initial estimate of 0.1%, and the second quarter was also downwardly revised. The BoE anticipates zero GDP growth in the final quarter of 2024, further downgrading its November estimate. Against this backdrop, the MPC report and Governor Bailey's speech will be closely scrutinized for insights into the potential growth rate of the UK economy. A downward revision of the current 1.3% estimate seems likely, potentially bolstering the case for further interest rate cuts in upcoming meetings, although a rapid pace of reductions appears unlikely. Adding to the complexity is the recent surge in UK government bond yields (Gilts), which have risen to multi-year highs at the start of the year. Concerns about government spending and tax decisions have fueled this rally, with some analysts linking it to the rise in US Treasury yields following the inauguration of President Donald Trump. However, yields have retreated in recent weeks amid growing fears that the economic slowdown could deepen under Trump's tariff policies. These concerns have also fueled speculation that the BoE will have no choice but to cut interest rates further.The BoE's interest rate decision is expected to have a significant impact on the GBP/USD exchange rate. While a 25 bps rate cut is already factored in, the GBP's reaction will likely hinge on the BoE's fresh economic projections and the voting breakdown of the Monetary Policy Committee. If the outcome is dovish, the GBP could weaken, but a hawkish surprise could strengthen the currency. Currently, the GBP/USD pair trades above the 1.2500 mark, recovering from a weekly low of 1.2248. The recent surge in the US Dollar (USD) at the beginning of the week, driven by President Trump's announcement of tariffs on imports from Mexico, Canada, and China, has since subsided after he postponed the implementation of these levies, at least on Mexican and Canadian imports.Analysis suggests that the GBP/USD pair may resume its downward trend with a dovish tilt, although the reaction could be limited as investors anticipate the move. If policymakers sound hawkish, the GBP/USD is likely to gain further upward momentum. Immediate resistance for the GBP/USD pair is at the 1.2600 level, with gains beyond that exposing 1.266, the December 19 daily high. Beyond that, the rally could continue towards the 1.2700 level
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