Traders Scale Back BOE Rate Cut Expectations

The Bank of England's (BOE) cautious approach to monetary policy in 2024 has left traders reevaluating their expectations for rate cuts in the coming year. Initially, markets priced in six rate cuts, but the BOE delivered only two, leaving borrowing costs higher than anticipated. This shift has led traders to scale back their expectations, now pricing in just three rate cuts for 2025, starting in February.

The BOE's slower pace of rate cuts, compared to its counterparts, has left the UK economy with higher borrowing costs than initially forecast. This cautious approach has resulted in the pound being the best-performing G10 currency this year, as inflation has fallen faster than expected, now just above the 2% target. However, businesses and consumers have criticized the BOE for inflicting unnecessary pain, and the central bank has faced political pressure to cut rates.

The BOE's reluctance to ease too quickly into a tight labor market has led to a more gradual recovery, with GDP growth projected at 1.00% in 2024, down from the previous 1.25% forecast. Markets are now pricing in just three rate cuts for 2025, starting in February, reflecting a more cautious outlook.



The BOE's cautious stance on inflation has significantly influenced market expectations and investor sentiment towards UK assets. Despite the BOE cutting rates twice in 2024, investors initially priced in six cuts, reflecting aggressive bets on easing monetary policy. However, the BOE's reluctance to ease too quickly into a tight labor market has left it lagging behind its counterparts, with the pound being the best-performing G10 currency this year. This cautious stance has led to a more measured market reaction, with traders now pricing in just three rate cuts for 2025, starting in February.

The BOE's success in taming inflation, which is now just above the 2% target, has also contributed to this shift in investor sentiment. The central bank's challenge lies in balancing economic growth and inflation control, as businesses and consumers grapple with higher borrowing costs than initially anticipated. Despite the BOE's two rate cuts, the economy has not experienced the expected boost, with GDP growth revised down to 1.00% in 2024. Inflation, however, has fallen more rapidly than forecast, reaching 1.70% in September. This disparity highlights the BOE's challenge in navigating the complex landscape of economic growth and inflation management.