Bank of England Rate Cut Likelihood Drops to 43% Amid Inflation Concerns

The likelihood of the Bank of England (BoE) cutting interest rates again this year has diminished significantly. Initially, market expectations in the summer were for at least one more 25 basis point reduction, considering factors such as moderate economic growth, slowing wage increases, and enhanced trade certainty following an early tariff agreement with the White House. However, these expectations have waned, particularly after the BoE's decision to maintain its current policy stance in August. The BoE's cautious approach, coupled with the economic data and trade developments, has led to a shift in market sentiment, making further rate cuts less likely in the near term. The BoE's focus on maintaining economic stability and managing inflationary pressures has become more pronounced, reducing the urgency for additional monetary easing.

In July, the inflation rate rose to 3.8%, surpassing expectations. This development has further solidified the market's belief that the BoE will maintain its current interest rate of 4% for the remainder of the year. The BoE's commitment to eliminating any existing or new persistent inflationary pressures, along with the governor's warnings about the upward risks to inflation due to geopolitical uncertainties, has reinforced market expectations that the BoE will be cautious about lowering rates prematurely.

The August monetary policy meeting marked a turning point in market expectations. The decision to maintain the current interest rate was passed with a narrow 5-4 vote, with dissenting policymakers favoring a continuation of the current rate. This decision, coupled with the BoE's emphasis on addressing inflationary pressures, has led to a more cautious outlook on future rate cuts. The market now anticipates that the BoE will keep the base rate at its current level until at least the final meeting of the year in December, with a 57% probability of this outcome.

Overall, the BoE's recent actions and statements indicate a strong commitment to maintaining economic stability and managing inflation. This cautious approach has led to a significant reduction in the likelihood of further rate cuts this year, as the central bank focuses on addressing inflationary pressures and ensuring economic stability in the face of geopolitical uncertainties.