February 6, 2025 – Written by Ben Hughes
STORY LINK Bank of England: GBP Losses vs EUR and USD, Markets Expect Three More Rate Cuts in 2025
Pound Sterling traded lower against the Euro and US Dollar into the Bank of England (BoE) decision, not helped by a weaker-than-expected reading for the construction PMI index.
Sterling dipped sharply following the BoE cut to 4.50% with markets considering that there is scope for more rate cuts this year. Markets are now pricing in around a 20% chance of a further cut in March.
Domestic and global factors will be crucial with the BoE more likely to want to wait until May.
The Pound to Dollar (GBP/USD) exchange rate slumped to lows at 1.2360 before a tentative recovery to 1.2400 as the dollar pared gains and compared with 4-week highs at 1.2550 on Wednesday.
According to Scotiabank, “Short-term price action suggests a minor peak at least formed yesterday at 1.2550.”
SocGen commented, “A pullback is underway. October 2023 low of 1.2090/1.2035 is a key support zone.”
ING still expects dollar strength will help drive GBP/USD to 1.19/20 later in the year.
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The Pound to Euro (GBP/EUR) exchange rate also dipped sharply to 1.1950 from 1.2000 before settling around 1.1970.
Danske Bank still recommends buying GBP/EUR dips to the 1.1900 area.
The Bank of England cut interest rates by 25 basis points to 4.50%, which was in line with expectations.
There was a surprise on the vote split with a 7-2 vote for the decision.
ING commented, “There’s nothing unusual or unexpected about the Bank of England’s decision to cut rates by 25 basis points to 4.50% this month. As for the vote split, well that’s anything but.”
Dhingra and Mann both voted for a 50 basis-point cut to 4.25%. Mann’s decision was notably surprising given her fears over inflation.
ING added, “Not only has Mann ended her fight against rate cuts, but she has doubled down with a vote to slash rates by 50bp. Though not directly attributed to Mann, the meeting minutes suggest that she saw a need to give a “clear signal” on where interest rates need to get to, whilst still recognising policy needs to stay restrictive for some time to come.”
There was a small net decline in the UK 10-year yield while the FTSE 100 index hit a record high with a daily gain of over 1.5%.
The growth forecasts were downgraded with the BoE now predicting GDP growth of 0.75% in 2025 compared with the 1.5% forecast in November.
According to Luke Bartholomew, deputy chief economist at abrdn, “The fact that two MPC members voted to deliver a bumper 50 basis-point cut, despite revising up near-term inflation forecasts, gives a sense of how concerned some policymakers are about the headwinds to growth.”
There were, however, upgrades to the 2026 and 2027 GDP growth forecasts to 1.5% from 1.25% as the budget measures take effect.
Looking at inflation, the bank warned that it is likely to rise to 3.7% over the first half of this year due to the increase in utility prices.
The forecast in 2-year times is now 2.3% from 2.2% in November.
According to the bank, “Domestic inflationary pressures are moderating, but they remain somewhat elevated, and some indicators have eased more slowly than expected.”
In this context, it commented, “the Committee will pay close attention to any consequent signs of more lasting inflationary pressures.”
Governor Bailey reiterated that the bank will take a gradual and careful approach to cuts.
According to Bailey “We expect to be able to cut bank rate further as the disinflation process continues, but we will have to judge meeting by meeting, how far and how fast.”
On the international dimension, he noted, “We live in an uncertain world, and the road ahead will have bumps on it.”
He added; “The judgment we will have to make at our future meetings is whether underlying inflationary pressures in the UK economy are easing enough to allow further cuts in bank rate.”
MUFG commented, “we expect the BoE to stick to their “gradual approach to removing monetary policy restraint” which has been consistent with a rate cut every quarter since the easing cycle started in August. We expect the BoE to deliver 100bps of easing this year.”
According to ING; Weaker growth, higher market rates and relatively limited scope to credibly trim public spending projections suggest further tax hikes are inevitable in the autumn. A more fragile jobs market and the prospect of better news on services inflation in the spring should also help cement a gradual string of rate cuts from the Bank of England this year.
Following the decision, traders are now pricing in three further rate cuts this year.
ING added, “That feels to us like the path of least resistance, though today’s vote split does suggest there’s an outside chance the Bank still moves faster.”
Investec Chief Economist Philip Shaw commented; “Fairly plainly, it is a dovish set of minutes overall and although Catherine Mann’s decision to back a 50-bp cut was a surprise, she has warned for a while that she is a supporter of monetary policy activism.”
He added, “The divergent views on the committee may make it more difficult to chart the course of interest rates over the remainder of 2025, but for now, we stand by our view that there will be three further 25bp cuts to 3.75% by the end of this year.”
According to Capital Economics, “the Bank of England showed some signs that it may cut rates faster and further than our forecast of a decline to 3.50% by early 2026.”
KPMG Chief Economist Yael Selfin expressed some caution; “The tone in the minutes signals a clear easing bias for all MPC (Monetary Policy Committee) members and leaves the door open for further interest rate cuts this year. Nonetheless, domestic uncertainty remains with the upcoming tax rises and the increase in the National Living Wage.”
She added, “The Bank will assess the second-round effects of these policy changes and whether they lead to a rebound in domestic price pressures. This will likely mean the pace of cuts will be gradual, and overall, we expect only two further cuts, leaving base rates at 4% by the end of 2025.”
Neil Birrell at Premier Miton Investors noted the structural challenges which could dampen Pound sentiment; “The Bank of England cut its base rate to give the economy a boost that is much needed. The fact that two members voted for a 0.5% cut is telling, clearly showing concern over the parlous state of economic growth, which is not something the government will appreciate.”
He added, “With growth under threat and inflation remaining higher than hoped, that provides a combination that is likely to see the word “stagflation” being banded around.”
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TAGS: Pound Sterling Forecasts
