With inflation news worsening, the Bank of England is expected to hold interest rates steady at the next Monetary Policy Committee meeting on March 20. That would leave the base rate unchanged at 4.5%.
However, expectations for 2025 have changed considerably, and more rate cuts are now seen down the road.
There is a 95.0% chance of a rate hold this month, according to interest rate swaps data, with a 77.0% chance of a cut at the MPC’s meeting in May and a 55.6% chance of a cut in August. This is a marked contrast from January, when traders anticipated only one cut this year, in February.
These projections are potentially at odds with the recent upward inflationary trend seen in the UK’s inflation data. Last month, the UK Consumer Prices Index (CPI) jumped to 3.0% from 2.5% in December.
“It seems a strange change of tack, especially given that inflation increased in January,” observes Michael Field, chief market strategist EMEA at Morningstar. “If anything, expectations of cuts should be moving in the opposite direction.”
Field explains: “There are likely two drivers behind this move. First, growth expectations for 2025 were recently halved by the BoE to just 0.75%. This means the risk of overheating is very low, and if anything, lower rates are required to stimulate the economy. Secondly, the European Central Bank is currently working off 2.5% rates and is likely to cut a couple of more times this year. This makes the current BoE rate of 4.5% look incongruous, especially when the economic environments are quite similar.”
What Is the Bank of England’s Base Rate?
The UK’s base rate sits at 4.5%, following three rate cuts in August and November last year and on Feb. 6 this year. At its February gathering, the MPC said it voted 7-2 in favor of the decision. Next week, investors will see how the committee’s consensus changes.
The UK’s latest inflation data for the 12 months leading into January 2025 showed CPI inflation running at 3.0%. This is 0.5% higher than December’s data and 1.0% higher than the Bank of England’s target of 2.0%.
Persistent inflationary activity has already led to fears that the Bank may keep rates higher for longer, putting pressure on those with significant debt and mortgage holders switching to more expensive packages after their fixed-rate deals end. However, the UK mortgage market remains competitive, so borrowers of all kinds should survey the mortgage deals on offer and get professional advice to navigate changing interest rates.
Will the Bank of England Continue to Cut Rates in 2025?
Significant uncertainty continues to surround monetary policy in the UK, Europe, and across the Western Hemisphere. For one, investors still aren’t quite sure what effects US government tariffs will have on the global economy. The geopolitical situation changes daily.
Plenty of economists are still concerned about the UK’s lack of progress on GDP. The UK base rate is still relatively high. Fears that high rates are stifling growth by limiting spending in the real economy are potentially justified. We know that the UK economy grew 0.1% in the fourth quarter of 2024 after a no-growth third quarter. Fresh data from the Office For National Statistics on Mar. 14 now shows an unexpected shrinking of GDP in January. That was driven by lower production output, the ONS said.
On the Continent, the balance of power over the future of Ukraine has shifted dramatically in just a few weeks. In the US, equity markets are reacting negatively to the uncertainty this causes for company order books, balance sheets, and investor earnings. Several large investment banks, including Goldman Sachs, believe a recession is more likely in the US.
Meanwhile, commitments to increase defense spending in the UK and Europe have sent bond yields rising. This was recently visible in Germany, which abandoned its long-held debt brake, lifting defense stocks like Rheinmetall RHM and heralding a new era of government spending. Bund yields spiked.
In the UK, a pledge to reduce the government’s international aid budget in favor of more spending by the Ministry of Defense has achieved certain political aims. But the longer-term effects—alongside other government policies announced at last year’s October Budget—may well be inflationary too. If the data shows persistent inflation in the UK economy, the Bank of England will likely continue to hold rates.
What Will Equities and Bonds Do if the Bank of England Holds Rates?
Equity markets typically react positively to rate cuts. That said, markets appear to have priced in a rate hold already, so the reaction to such a move could be muted. However, there are plenty of other factors that could affect UK equity market performance in the coming days. Equities are currently exceptionally sensitive to geopolitics, so significant developments could have a pronounced effect on investor sentiment.
This has been most visible in the US, where bullish sentiment over the return of Donald Trump as president in late 2024 has given way to serious anxiety. Last Monday, Tesla TSLA stock closed 15% lower on fears that CEO Elon Musk’s political activities could lead to a smaller order book at the company this year.
Bond investors are exposed to the uncertainty of geopolitics too. Expectations over government and corporate spending are changing across the world. Bond prices and yields are inversely correlated, so the situation has sent prices down and yields upward.
This is where the duration of bond holdings really matters. Because bonds are sensitive to interest rate changes, longer-duration bonds are particularly affected by changing monetary policy. As longer-term projections change, so too do prices (and the yields) of longer-term securities. Bond managers are reacting in different ways. Some are selling their longer-dated holdings. Others are buying to take advantage of attractive prices and higher yields by buying the dip.
When Is the Bank of England’s Next Meeting?
The Bank of England has a calendar of meetings and monetary policy publications:
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar's editorial policies.
