The Bank of England delivered a widely anticipated interest rate cut on Thursday, lowering the key rate by 25 basis points to 4.5%. This move marks a significant shift in the central bank's monetary policy, as it demonstrates a softer stance than the market had forecast. With inflation exceeding the 2% target and economic growth forecasts adjusted downward, the bank's decision aims to narrow the gap between the key rate and inflation. This strategic adjustment reflects the Bank of England's belief that disinflationary trends will continue to prevail.
The rate cut decision was in line with analysts' expectations, yet it sparked a notable reaction in financial markets. The Pound initially accelerated its decline, reaching a low of 1.2360 against the US Dollar before recovering slightly to 1.24. This decline put the GBP/USD pair deep in negative territory, with the 50-day moving average acting as a temporary technical hurdle during its recovery attempt. Market participants are now anticipating three more rate cuts this year, an increase from the one or two cuts that were previously expected.
Within the Monetary Policy Committee, a split opinion emerged as two out of nine members advocated for a more substantial rate cut of 50 basis points. The ongoing inflationary pressures, which saw December's figure reach 2.5%, have prompted this divergence in viewpoints. Meanwhile, the central bank lowered its economic growth forecast for 2025 from 1.5% to 0.75%, signaling a cautious outlook for the coming years.
The Bank of England's intention behind this rate cut is to reduce the restrictive bias of its monetary policy and align more closely with prevailing inflation rates. By doing so, it aims to foster economic stability while navigating through current disinflationary trends. The initial market reaction to the report was dovish, reflecting the central bank's unexpected leniency.