The Bank of England (BoE) announced a widely anticipated reduction in the policy rate by 25 basis points (bps) at its February policy meeting, bringing the rate to 4.5%. This decision aligns with investor expectations as the central bank seeks to further ease monetary policy amid ongoing economic uncertainties. In a surprising twist, two members of the Monetary Policy Committee (MPC), Catherine Mann and Swati Dhingra, voted for a more aggressive 50 bps cut, triggering a selloff in the Pound Sterling.
The BoE's decision to ease monetary policy comes as a response to trade war fears and subdued demand for the US dollar. By lowering interest rates, the BoE aims to stimulate economic growth and combat potential downturns. However, the unexpected call for a larger rate cut by MPC members Mann and Dhingra, particularly Mann who is known for her hawkish stance, took investors by surprise, causing the Pound Sterling to plummet below 1.2400 on Thursday.
Following the BoE meeting, investors quickly reacted by offloading British currency holdings. The Pound Sterling experienced a significant decline, reaching a multi-day low. This reaction reflects investor concerns over the UK’s economic outlook and the potential impact of a more dovish monetary policy stance on the currency's value.
The central bank also revised its Gross Domestic Product (GDP) forecast for the year, reducing it from 1.5% projected in November to 0.75%. This downward revision indicates the BoE's cautious view on the UK’s economic growth prospects amidst global trade tensions and Brexit-related uncertainties.
Despite the vote split of 8-1 in favor of a 25 bps cut, all MPC officials supported further easing of monetary policy, underscoring their commitment to navigating the economic challenges ahead. The BoE's decision aligns with its strategic approach to bolster economic resilience while addressing external pressures.
The MPC’s vote reflects an ongoing debate within the committee about the appropriate level of monetary stimulus required to support the UK economy. While most members favored a moderate reduction, Mann and Dhingra's vote for a deeper cut highlights differing perspectives on how aggressively to address economic headwinds.
Investors had largely anticipated the 25 bps interest rate cut, yet the unexpected push for a more substantial reduction highlighted underlying divisions within the committee. These divisions underscore the complexities of balancing economic growth objectives with maintaining currency stability.