HSBC now expects BoE to deliver interest rate cuts once per quarter from September 2025 vs prior forecast of cuts every meeting

HSBC now expects BoE to deliver interest rate cuts once per quarter from September 2025 vs prior forecast of cuts every meeting

The Bank of England (BoE) is expected to deliver interest rate cuts more frequently than previously anticipated, according to a recent report from HSBC. Instead of cutting rates every meeting as previously forecasted, the BoE is now expected to reduce rates once per quarter starting from September 2025 [1].

The BoE's decision to adopt a slower pace of rate cuts is a response to the economic fragility that was visible in recent consumer confidence and PMI data. The bank will want to look through the bump higher in largely imported inflation and respond to the economic challenges [1]. However, this is not great news for equity investors, as the BoE is unlikely to cut rates as fast as they would like for fear of unanchoring inflation expectations [1].

HSBC expects the BoE to take the Bank Rate much closer to 3% over the next 12 months, implying several cuts that are not anticipated by the market [1]. This is good news for gilt investors, as HSBC believes the BoE's forecasts are too hawkish, and the central bank may be able to cut more aggressively than anticipated [1].

The Monetary Policy Committee (MPC) has been hampered by a weaker GBP and a rise in import inflation, which is responsible for the lion's share of the pick-up in quarterly inflation to 3.7% [1]. However, this hump in inflation is expected to fade as inflation eases towards 3% at the start of 2026 and falls further towards 2.3% in Q1 2027 [1].

Governor Bailey's assessment that productivity has fallen will be sobering to Chancellor Reeves and illustrate the challenge she has in her growth priority [1]. In the coming meetings, the BoE will be very data-driven. If productivity picks up more than anticipated, inflation could be more restrained, but if supply growth disappoints, there is a risk inflation moves higher [1].

HSBC expects the BoE to take a more hawkish view on inflation, as recent pay data is too "noisy," and the number one driver of wage growth was the increase in the National Living Wage and employee National Insurance [1]. As the labor market continues to soften, the BoE is expected to be in a position to cut more than they are currently letting on [1].

References:
[1] HSBC. (2025, February 6). Bank of England faces one more bump in the road before accelerating rate cuts. Retrieved from https://www.hsbc.co.uk/wealth/insights/market-outlook/special-coverage/bank-of-england-faces-one-more-bump-in-the-road-before-accelerating-rate-cuts/