Bailey Winds Up the Rate Cut, But Markets Aren't Convinced

The Bank of England (BoE) has finally delivered on its long-awaited interest rate cut, but the markets seem to have other ideas. Governor Andrew Bailey and his team at the MPC have been hinting at a rate cut for months, and today they finally pulled the trigger, lowering the benchmark rate by 25 basis points (bps) to 4.5%. However, the markets appear to be unconvinced by the BoE's cautious approach, with investors pricing in two more 25 bps rate cuts by the end of 2025 (Bloomberg, 2025).

The BoE's decision to cut rates by 25 bps in January 2025 aligns with market expectations, but the Bank's interest rate path diverges from market expectations in the following months. The BoE's latest projections suggest that interest rates will continue to fall gradually from the current level of 4.5%, but the pace and extent of further cuts are not explicitly stated. This cautious approach has led to a divergence between the BoE's interest rate path and market expectations, with investors betting on more aggressive rate cuts.

The BoE's cautious approach to rate cuts is driven by several factors, including a weaker economic growth and inflation outlook, fiscal stimulus from the budget, global trade uncertainties, and market reaction to the Bank's policy decisions. The BoE's Monetary Policy Report and forecasts released alongside the January 2025 decision signal a more pessimistic outlook on economic growth and inflation. The Bank cut its forecast for economic growth this year, next year, and the following year, as well as raising the inflation forecast. The economy's potential growth rate has also dropped, from 1.5% in 2024 to 0.75% in 2025 (Bank of England, 2025).

The BoE's cautious approach to rate cuts has potential implications for the UK economy, particularly in terms of growth and inflation. The Bank's downgraded growth forecast suggests a more tepid growth outlook, with the UK economy expected to skirt clear of a formal recession only by the narrowest margin in the coming months. The BoE's focus on managing inflation expectations is driven by its concern about maintaining low and stable inflation, with Governor Andrew Bailey stating, "Low and stable inflation is the foundation of a healthy economy and it's the Bank of England's job to ensure that" (Source: BoE, 2025).

The BoE's cautious approach to rate cuts has led to a divergence between the Bank's interest rate path and market expectations. While the BoE's decision to cut rates by 25 bps in January 2025 aligns with market expectations, the Bank's more cautious approach to further rate cuts has raised questions about the BoE's ability to manage the UK economy effectively. The markets appear to be unconvinced by the BoE's cautious approach, with investors pricing in more aggressive rate cuts.

In conclusion, the Bank of England's cautious approach to rate cuts has led to a divergence between the Bank's interest rate path and market expectations. The BoE's decision to cut rates by 25 bps in January 2025 aligns with market expectations, but the Bank's more cautious approach to further rate cuts has raised questions about the BoE's ability to manage the UK economy effectively. The markets appear to be unconvinced by the BoE's cautious approach, with investors pricing in more aggressive rate cuts. The BoE's cautious approach has potential implications for the UK economy, particularly in terms of growth and inflation, and the Bank's ability to manage the economy effectively will be a key factor in determining the UK's economic outlook in the coming years.